Accrued Property Taxes Effect on Cost Basis

[Kyle Meyers]

I am sure this is a pretty basic question with a straight-forward answer, but I have thought about it too much and gotten myself confused by my own thoughts.

When purchasing a rental property, it has been standard for me to receive a credit on the HUD-1 for accrued property taxes for the time the seller has owned the property, but which are not due to the county yet.

How should this amount be treated for income tax purposes? Would the amount reduce the cost basis for the property for depreciation? Does this effect how I report property taxes paid on Schedule E?

[Steven Hamilton II]

Kyle,

1.How should this amount be treated for income tax purposes?
This amount will be a simple increase in basis.

2. Would the amount reduce the cost basis for the property for depreciation?
This amount will increase the basis for depreciation

3. Does this effect how I report property taxes paid on Schedule E?
Those taxes will be added to your basis in the property. You WILL NOT report those as property taxes paid.

This will be included in your depreciation calculation.

I have attached a quick reference for basis in regards to the HUD-1.