Case study: handling expenses incurred in acquiring a residence.

• Author: Ellentuck, Albert B.

A HOMEBUYER GENERALLY INCURS VARIOUS settlement and closing costs, such as title and attorneys' fees, in connection with a residence purchase. These costs may be deductible, capitalizable (added to basis), or, in some cases, neither.

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Deducting Real Estate Taxes

Real estate taxes are taxes imposed on interests in real property (Regs. Sec. 1.164-3(b)). Rev. Ru!. 80-121 provides that the tax must (1) be generally imposed or triggered by the ownership of real property and not the incidents of property ownership such as use or disposition, (2) be measured by the value of real property, and (3) not solely be a personal liability of the owner. Similarly, real estate taxes do not include special assessments for capital improvements such as sidewalks, streets, or similar improvements (Regs. Sec. 1.164-4). The taxpayer can only add these assessments to the tax basis of the home.

Questions arise as to who is considered the owner of real property when a lease-option agreement is involved. These questions center on whether the lease-option agreement constitutes an actual purchase of the property or a mere option to purchase. State law determines whether there is considered to be an actual transfer of legal title (i.e., a purchase). Absent such a transfer, it must be determined (under state law) whether there is a practical assumption of the benefits and burdens of ownership. The equitable or beneficial owner of real property who pays the real estate taxes imposed on such property may deduct them even though another person holds the legal title.

In a case involving a lease-option agreement, the Tax Court examined the facts and concluded that even though the lessee had exclusive use of the property, various benefits and burdens of ownership remained with the lessor (i.e., payment of insurance premiums and authority to make key decisions on maintenance and improvements to the property, etc.); therefore the taxpayer/lessee failed to prove that he obtained equitable ownership of the property and could not deduct the real estate taxes associated with it that he had paid (Jones, T.C. Memo. 2006-176).

The purchaser can deduct real estate taxes as an itemized deduction for the portion of the property tax year he owned the home, whether the buyer or seller actually paid the tax. In the year a property is sold, property taxes must be apportioned between the buyer and seller based on the number of days each held the property during the real...