Deductible real estate taxes are any state, local, or foreign taxes on real estate levied for the general public welfare. The taxing authority must base the taxes on the assessed value of the real estate and charge them uniformly against all property under its jurisdiction. Deductible real estate taxes generally do not include taxes charged for local benefits and improvements that increase the value of the property. See Taxes for local benefits, later.
If you use an accrual method, you generally cannot accrue real estate taxes until you pay them to the government authority. However, you can elect to ratably accrue the taxes during the year. See Electing to ratably accrue, later. taxmap/pubs/p535-019.htm#en_us_publink1000142098
Generally, you cannot deduct taxes charged for local benefits and improvements that tend to increase the value of your property. These include assessments for streets, sidewalks, water mains, sewer lines, and public parking facilities. You should increase the basis of your property by the amount of the assessment.
You can deduct taxes for these local benefits only if the taxes are for maintenance, repairs, or interest charges related to those benefits. If part of the tax is for maintenance, repairs, or interest, you must be able to show how much of the tax is for these expenses to claim a deduction for that part of the tax. taxmap/pubs/p535-019.htm#en_us_publink1000142099
Waterfront City, to improve downtown commercial business, converted a downtown business area street into an enclosed pedestrian mall. The city assessed the full cost of construction, financed with 10-year bonds, against the affected properties. The city is paying the principal and interest with the annual payments made by the property owners.
The assessments for construction costs are not deductible as taxes or as business expenses, but are depreciable capital expenses. The part of the payments used to pay the interest charges on the bonds is deductible as taxes. taxmap/pubs/p535-019.htm#en_us_publink1000142100
Water bills, sewerage, and other service charges assessed against your business property are not real estate taxes, but are deductible as business expenses. taxmap/pubs/p535-019.htm#en_us_publink1000142101
If real estate is sold, the real estate taxes must be allocated between the buyer and the seller.
The buyer and seller must allocate the real estate taxes according to the number of days in the real property tax year (the period to which the tax imposed relates) that each owned the property. Treat the seller as paying the taxes up to but not including the date of sale. Treat the buyer as paying the taxes beginning with the date of sale. You can usually find this information on the settlement statement you received at closing.
If you (the seller) use an accrual method and have not elected to ratably accrue real estate taxes, you are considered to have accrued your part of the tax on the date you sell the property. taxmap/pubs/p535-019.htm#en_us_publink1000142102
Al Green, a calendar year accrual method taxpayer, owns real estate in Elm County. He has not elected to ratably accrue property taxes. November 30 of each year is the assessment and lien date for the current real property tax year, which is the calendar year. He sold the property on June 30, 2008. Under his accounting method he would not be able to claim a deduction for the taxes because the sale occurred before November 30. He is treated as having accrued his part of the tax, 180/365 (January 1–June 29), on June 30, and he can deduct it for 2008.taxmap/pubs/p535-019.htm#en_us_publink1000142103
If you use an accrual method, you can elect to accrue real estate tax related to a definite period ratably over that period. taxmap/pubs/p535-019.htm#en_us_publink1000142104
John Smith is a calendar year taxpayer who uses an accrual method. His real estate taxes for the real property tax year, July 1, 2008, to June 30, 2009, are $1,200. July 1 is the assessment and lien date.
If John elects to ratably accrue the taxes, $600 will accrue in 2008 ($1,200 × 6/12, July 1–December 31) and the balance will accrue in 2009.taxmap/pubs/p535-019.htm#en_us_publink1000142105
You can elect to ratably accrue the taxes for each separate trade or business and for nonbusiness activities if you account for them separately. Once you elect to ratably accrue real estate taxes, you must use that method unless you get permission from the IRS to change. See Form 3115, later. taxmap/pubs/p535-019.htm#en_us_publink1000142106
If you elect to ratably accrue the taxes for the first year in which you incur real estate taxes, attach a statement to your income tax return for that year. The statement should show all the following items.
- The trades or businesses to which the election applies and the accounting method or methods used.
- The period to which the taxes relate.
- The computation of the real estate tax deduction for that first year.
Generally, you must file your return by the due date (including extensions). However, if you timely filed your return for the year without electing to ratably accrue, you can still make the election by filing an amended return within 6 months after the due date of the return (excluding extensions). Attach the statement to the amended return and write "Filed pursuant to section 301.9100-2" on the statement. File the amended return at the same address where you filed the original return. taxmap/pubs/p535-019.htm#en_us_publink1000142107
If you elect to ratably accrue for a year after the first year in which you incur real estate taxes or if you want to revoke your election to ratably accrue real estate taxes, file Form 3115. For more information, including applicable time frames for filing, see the instructions for Form 3115.