Closing 12/31, tax headache?

Question

I have a closing scheduled for 12/31, since the seller is one of the lucky few who will be impacted by the long-term capital gains tax increase for those making over $200K.

I think it will be a pain to close this day. I'll have to report rental income for one day, and I'll have to pay property taxes for one day (it won't be taken care of by the title co. because we pay property taxes for the prior year).

Can I ask the title co. (assuming the seller agrees) to do the prorating of rents and taxes as of Jan. 1st, and if so, can I effectively leave this property off of my tax return for the year? Or will I have to include it due to the one day of depreciation?

Account Closed · Answer

The closing date and settlement date aren't always the same.  If the settlement date is actually in January then you have no income or expenses for the current year.  Sounds as if the seller is going to want the settlement date to happen on the same day as closing though.

From a tax standpoint the IRS looks at constructive receipt.  If a check is available for pickup on 12/31 but you wait to pick it up on 1/1, then it can be said that constructive receipt occurred on 12/31 and it will be this year's income and you would want to claim any expenses allowed.

I would check with the title company to find out when settlement will actually occur.

Dave Toelkes · Answer

How are you planning to use the property?

If you are planning to move into the property as your primary residence, then the rental income is not reportable since your period of rental use is less than 14 days.

If you had always planned to use the property as a rental, then report the rental income and take a half month of depreciation for December.  Property placed in service for rental use during the month starts depreciation from the mid-point of the month.

Mariah Jeffery · Answer

I bought it strictly to use as a rental so I'm pretty much SOL there. I really would rather leave it off of my tax return for 2010 just because of the hassle, but I don't think I can legally.

The property taxes ended up working out nicely. They are about $6,300/year for all 4 houses. Since they are paid in arrears, the seller owned me a credit of ~$6,250 at closing. That significantly reduced my upfront costs, and now I have to pay half of that in April and half in October.

Mariah Jeffery · Answer

We ended up closing and settling on 12/30 because the title co. was closed on 12/31. I received $51 in rent for 2010.

Dave Toelkes · Answer

Check with your favorite IRS representative.  If you go to settlement on 12/31, then your holding period does not start until Jan 1.

This means that you won't be able to place the property into service as a rental until Jan 1 at the earliest.  So, no deductible rental expenses for 2010

Just how I see it.

Closing 12/31, tax headache?

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