Accounting Question - Question For Accountants - Property Tax Prorations Home Purchase

2 Replies

Hopefully I explain this in a way that is easy to understand.  This is my first rental property purchase and also the first time I've really had to deal with any accounting of this nature, so I would appreciate any guidance.

Over the weekend, I decided to go ahead and do a reconciliation of our financials and bank statements when I thought something didn't quite look right.

On May 16th, 2014, we purchased a rental property.  At the time of purchase, the seller had already paid property taxes for the year, so everything was paid and current and there wouldn't be another property tax payment until the upcoming September.  Because of this, our expectation was that we would be reimbursing the seller for prorated amount of property taxes from our point of purchase.

However, when we reviewed the closing statement and the balance sheet, we realized that no where on the closing statement were we reimbursing the seller for prepaid property taxes for after we took possession.  In fact, not only did we not have to reimburse them for prepaid property taxes, but they also provided us with a pro-rated amount for property taxes from 7-1-13 to 5-16-14 (a period of time several months prior to our ownership) - which ultimately lowered our closing costs by $1000.  We went into the deal expecting to pay all closing costs and yet the seller basically gave us a year's worth of taxes back.

On my financial statement, it shows I paid all the typical closing costs (attorneys, appraisal, insurance, origination fees, etc) but that I did not pay ANY property taxes during closing.  And then on top of that, I have this sum of money I received from the seller that just so happens to be an amount both designated as property tax reimbursement and pro-rated as such.

So here's my question:
How do I classify these numbers on my general ledger?

The error I noticed is that back when I initially inserted the numbers into my software, I entered the $1000 as both a credit (since it was essentially cash we received off our closing costs) as well as classified it as a property tax (since it was pro-rated property tax). The result was that since I've yet to actually cut a check to pay any property taxes and because there weren't any reimbursements to the seller for pro-rated property taxes now that I own the property, it currently appears as though my current property tax expenses are negative $1000.

So, now I'm trying to reconsider how I need to really insert this into my system so I can accurately reconcile the account.

My initial thought now is to still consider that as a credit (since I did in fact receive those funds off my closing costs from the seller), but to instead classify that as Misc. Income - but then, is that really considered income or is it really classified prepaid taxes - thus essentially lowering my property tax deduction by $1000?

Secondly, the seller has nearly prepaid 4 1/2 months worth of property taxes for me (since they're paid up until September and I never reimbursed them on them closing statement) in addition to the $1000 I've already mentioned that they paid me for July 2013 to May 16th, 2014 when we took possession. Since the seller has paid those 4 1/2 months worth of taxes for me, do I need to report that as income? And if so, can I turn around and also take that same amount and offset it as a property tax payment.

Hopefully this makes sense and thanks for any help you can give. I have a tax professional I use on occasion, but I prefer learning and understanding these things myself and I can't seem to find the answer elsewhere.

Originally posted by @Landon Elscott:


The error I noticed is that back when I initially inserted the numbers into my software, I entered the $1000 as both a credit (since it was essentially cash we received off our closing costs) as well as classified it as a property tax (since it was pro-rated property tax). The result was that since I've yet to actually cut a check to pay any property taxes and because there weren't any reimbursements to the seller for pro-rated property taxes now that I own the property, it currently appears as though my current property tax expenses are negative $1000.

So, now I'm trying to reconsider how I need to really insert this into my system so I can accurately reconcile the account.

My initial thought now is to still consider that as a credit (since I did in fact receive those funds off my closing costs from the seller), but to instead classify that as Misc. Income - but then, is that really considered income or is it really classified prepaid taxes - thus essentially lowering my property tax deduction by $1000?

Secondly, the seller has nearly prepaid 4 1/2 months worth of property taxes for me (since they're paid up until September and I never reimbursed them on them closing statement) in addition to the $1000 I've already mentioned that they paid me for July 2013 to May 16th, 2014 when we took possession. Since the seller has paid those 4 1/2 months worth of taxes for me, do I need to report that as income? And if so, can I turn around and also take that same amount and offset it as a property tax payment.

 Landon,

The $1,000 is NOT your expense. That's why it's not coming out as a debit to you. The $1,000 is an expense that belongs to the seller, but you'll end up paying for it at a later date.

The appropriate treatment would be to classify the $1,000 as a liability called "property tax payable". When you end up paying the full year tax bill, apply $1,000 of the check to the liability, and the rest of the debit will go to your property tax expense. 

As for the prepayment of property tax, is that shown on your closing statement anywhere? Or did the seller pay this outside of closing?

Nathaniel Busch, CPA

Thanks.  That sort of makes sense about the property tax liability.  So essentially, they gave me cash at closing with the intentions I apply it to next years taxes.

The prepayment of property taxes is not shown on the closing statement anywhere.  They were fully satisfied outside of the closing and the seller never requested/mentioned any sort of reimbursement for them.

I guess what it comes down to "is the money we received at closing taxable income - even though its technically denoted for use toward property taxes".  

And secondly, since the seller has prepaid our taxes for this year, is that also considered taxable income even though its not mentioned on the closing sheet.  But then, if surely the seller couldn't claim a tax deduction for an amount prorated for which they didn't own the property I would think.