Property tax deduction

[Dean]

I guess we'll just have to agree to disagree on the issue of deductions. When it comes to taxes, I pay what I owe but I see no reason to pay more than I owe. If I'm entitled to a deduction and I have the documentation to back it up, I take it. I've never had an issue with the IRS due to deductions I've taken.

My view is I try to do it right. Take the legal deductions and avoid stretching it to things that are likely not deductible. I'd especially like to avoid things that are a red flag for an audit like taking a donation for donated timeshare usage. That said, there's no reason to avoid ANY deduction that one feels is legit and doesn't raise the audit flag. What happens IF they audit you is a different matter. Some of the comments are related to IF one is audited and IMO, that's not esp applicable here assuming the deduction is reasonable and I believe the one being discussed is.

 

[supersnoop]

I guess we'll just have to agree to disagree on the issue of deductions. When it comes to taxes, I pay what I owe but I see no reason to pay more than I owe. If I'm entitled to a deduction and I have the documentation to back it up, I take it. I've never had an issue with the IRS due to deductions I've taken.

I think you missed the point on where we disagree. I've repeatedly recommended to take every deduction that you can defend with a straight face. From my perspective, the tax component of reimbursed dues is not one I can defend. We can agree to disagree on that.

I'd especially like to avoid things that are a red flag for an audit like taking a donation for donated timeshare usage.

For the record, no part of a timeshare usage donation is deductible.

 

[YourEveryDayAdam]

I had my taxes done professionally for a couple of years when I transitioned to being self employed. The guy who did them gave me some advice: "Take every deduction you are entitled to but save all the paperwork to back it up. The IRS only goes after people who commit fraud and provided you never cross that line you have nothing to worry about. Never pass up a deduction you are entitled to out of fear that the IRS might come calling." I have followed that advice ever since and have never had an issue that I couldn't clear up quickly and easily with a phone call or by submitting a few pieces of documentation and a cover letter.

**DING DING** as someone who runs a small business, I find that that your tax professional's advice is key. The big things in dealing with the IRS: Report all of your income. Don't Lie.

As long as you can reasonably say that you thought you were entitled to the deduction, even if you actually weren't, you won't end up getting in trouble. This case fits that reasoning pretty well:

The argument is simple:
1) You are allowed to deduct all local and state taxes paid. 2) A portion of your closing costs was to pay for property taxes. 3) You reasonably calculated how much of your closing costs were for paying taxes. 4) You have documentation to back it up.

As I said before, if the IRS disagrees and it doesn't look like you were trying to commit fraud, the worst that will happen is they will just disqualify the deduction and you'll owe them the taxes you would've paid anyway.

The IRS audits so few people anyway, particularly if your income is less than $200k per year. Less than 1% of people get audited at the <$200k income level. Most that do at that level it's because they incorrectly reported their income, or their was a discrepancy in what was reported to them by employers (W2s) and what you reported on your tax return.

The IRS simply doesn't have the staff or funding to really go after anyone but those who are actually committing fraud.

 

[Dean]

I think you missed the point on where we disagree. I've repeatedly recommended to take every deduction that you can defend with a straight face. From my perspective, the tax component of reimbursed dues is not one I can defend. We can agree to disagree on that.

I'll have to disagree in a qualified way. It is deductible, the question is to whom. The person who paid it could deduct it and the buyer could deduct it if it was spelled out in the closing. The question is whether the buyer can deduct it if it's not spelled out. I'd say yes if the seller didn't do so. It's never a good idea to have 2 parties take the same deduction like split families both taking the deduction for the kids. IMO this does not raise an audit flag and if one is audited for other reasons might be disallowed but likely would not be.

For the record, no part of a timeshare usage donation is deductible.

Again, qualified. Partial use is never deductible but ownership is potentially as well as one could rent and donate the proceeds and thus take the deduction.

 

[lorenni]

I didn't pay the dues directly to DVC, rather reimbursed the seller for the total amount. Since I prepare my own taxes, I'm unclear of the IRS rules on this. I suppose the safe play is to just forget it this year.

You can deduct the taxes. Little to no risk of adjustment on audit. Keep the closing documents and the 2015 details that show the portion that is property tax with your tax records.

 

[lorenni]

You can deduct the taxes. Little to no risk of adjustment on audit. Keep the closing documents and the 2015 details that show the portion that is property tax with your tax records.

I should have added - the SELLER does run a risk of adjustment on audit since he/she was fully reimbursed for the taxes. (All this assumes the purchase occurred within 2015 - if you crossed into 2016 then you have timing issues as to when you can deduct the taxes paid).

 

[Dean]

I should have added - the SELLER does run a risk of adjustment on audit since he/she was fully reimbursed for the taxes. (All this assumes the purchase occurred within 2015 - if you crossed into 2016 then you have timing issues as to when you can deduct the taxes paid).

From what I understand the seller has the legal right to the deduction if the closing documents don't spell out otherwise. In reality the only real risk is if both take the deduction and one or both are audited. Even then it'd likely just be an adjustment, not a big deal above the general audit process.

 

[ScubaCat]

If you reimbursed the seller for a percentage of the property taxes, you can deduct that. It doesn't matter how it was ultimately paid (them first, then you reimburse.) It's easy to calculate. Just calculate the percentage of the annual points allocation you received, then multiply that by the property tax paid.

Example (numbers entirely made up): You paid dues on 100 of 250 points from 2015. Property tax was $600.

100/250 = .4 = 40%
Thus, you can deduct 40% of the property tax. $600 * .4 = $240

 

[supersnoop]

If you reimbursed the seller for a percentage of the property taxes, you can deduct that. It doesn't matter how it was ultimately paid (them first, then you reimburse.) It's easy to calculate. Just calculate the percentage of the annual points allocation you received, then multiply that by the property tax paid.

Example (numbers entirely made up): You paid dues on 100 of 250 points from 2015. Property tax was $600.

100/250 = .4 = 40%
Thus, you can deduct 40% of the property tax. $600 * .4 = $240

What if the seller paid the taxes in 2014, deducted them at that time, and then you reimbursed the taxes in 2015? The IRS regulations are based on time, not on points. Unless the taxes are specifically itemized on your closing statement, you're going to have a difficult time defending that deduction.

 

[GaryDis]

I'm not a DVC owner, nor even considering it, so I don't know for sure if there's any special,handling on this sort of closing, BUT:

My understanding is that property taxes in FL are always assessed in arrears. This means that at closing for a simple purchase (say of a home), the buyer can't possibly be paying any deductible property taxes because the tax for their first day of ownership hasn't been assessed yet. Amounts put into escrow in anticipation of taxes aren't deductible until the amounts are actually paid from escrow. I'd expect the annual DVC fees to be handled the same way but I don't know for certain.

 

[Dean]

I'm not a DVC owner, nor even considering it, so I don't know for sure if there's any special,handling on this sort of closing, BUT:

My understanding is that property taxes in FL are always assessed in arrears. This means that at closing for a simple purchase (say of a home), the buyer can't possibly be paying any deductible property taxes because the tax for their first day of ownership hasn't been assessed yet. Amounts put into escrow in anticipation of taxes aren't deductible until the amounts are actually paid from escrow. I'd expect the annual DVC fees to be handled the same way but I don't know for certain.

There's no escrow. Ignoring the sale issue, one can deduct the taxes in the year paid. The question here is whether a buyer can take the deduction for the taxes related to dues they're actually paying by reimbursing the seller, but it's not spelled out in the contract. As I understand it the technical answer is the person who actually writes the check to Disney is the one entitled to the deduction if not covered otherwise in the sale contract. I don't believe that technically reimbursing the fees would change that either way. From a practical standpoint I think the buyer is fine if they reimburse the seller for those dues/taxes regardless. Even if both took the deception I doubt it be a big deal even if both were audited.

 

[GaryDis]

There's no escrow.

The dues are playing the role of escrow in the sense that you pay the dues throughout the year, but the taxes are only paid out of the dues when the tax is assessed and billed, which I think is annually in Florida.

My take is that the buyer shouldn't be reimbursing the seller for the share of the dues going to taxes imposed on the seller.

 

[Dean]

The dues are playing the role of escrow in the sense that you pay the dues throughout the year, but the taxes are only paid out of the dues when the tax is assessed and billed, which I think is annually in Florida.

My take is that the buyer shouldn't be reimbursing the seller for the share of the dues going to taxes imposed on the seller.

The annual dues statement states the amount actually due and paid in the calendar year that's ending when they come in Dec. One could take the stance to make it even more complicated since the dues are on a calendar year basis as are the taxes to a degree. However, the points split the calendar year and thus when one reimburses a buyer for dues paid, they are often overpaying and in fact paying for part of the dues for the calendar year ending and the previous calendar year as well.

 

[LisaS]

I'm not a DVC owner, nor even considering it, so I don't know for sure if there's any special,handling on this sort of closing, BUT:

My understanding is that property taxes in FL are always assessed in arrears. This means that at closing for a simple purchase (say of a home), the buyer can't possibly be paying any deductible property taxes because the tax for their first day of ownership hasn't been assessed yet. Amounts put into escrow in anticipation of taxes aren't deductible until the amounts are actually paid from escrow. I'd expect the annual DVC fees to be handled the same way but I don't know for certain.

As part of the dues for each calendar year, DVC estimates the amount that will be needed for the property taxes. As owners we give them that money in January if we pay in full or monthly throughout the year for those who make monthly payments. Disney gets the tax bill in November I believe and pays it at that time. In December when we get our dues bill for the following year. The bill lists the actual property tax paid for the current year and whether we owe additional money (if the estimated taxes were less than the actual billed amount). Any additional amount due is added to the dues for the next calendar year.

The OP purchased the contract part way through 2015 so he/she did own the property during part of the 2015 tax year and reimbursed the seller for the 2015 dues which included the estimated tax payments for 2015. The OP's 2016 dues bill will show the actual property taxes paid for 2015 so that information could be provided to the IRS in the very unlikely event this deduction is ever questioned due to the tax information not being broken out in the closing statement.

 

[GaryDis]

As part of the dues for each calendar year, DVC estimates the amount that will be needed for the property taxes. As owners we give them that money in January if we pay in full or monthly throughout the year for those who make monthly payments. Disney gets the tax bill in November I believe and pays it at that time. In December when we get our dues bill for the following year. The bill lists the actual property tax paid for the current year and whether we owe additional money (if the estimated taxes were less than the actual billed amount). Any additional amount due is added to the dues for the next calendar year.

The OP purchased the contract part way through 2015 so he/she did own the property during part of the 2015 tax year and reimbursed the seller for the 2015 dues which included the estimated tax payments for 2015. The OP's 2016 dues bill will show the actual property taxes paid for 2015 so that information could be provided to the IRS in the very unlikely event this deduction is ever questioned due to the tax information not being broken out in the closing statement.

OK, that clears up some of the confusion from the earlier posts. And in this case, I agree with your earlier post saying to deduct a pro-rated share, ignoring any additional tax from 2014 that might have been added to the 2015 dues because the prior year estimate was too low.

It's so much easier when all you have to do is look at which subsection of the HUD-1 the property tax adjustment appears.

 

[pirate33]

The dues per point automatically include property taxes. My accountant thought
it was a no brainier to deduct based on the dues we reimbursed at closing. No need for the property tax portion of the dues to be broken out on the closing statement in my view. I just emailed member services to get the figure per point for the pertinent year and kept a copy of that in my tax folder. (The buyer wouldn't have a statement from DVC for the dues reimbursed to seller at closing.).

The seller should not be taking a deduction for amounts reimbursed at closing and if he or she does, that is his or responsibility. I would not even attempt to get involved in the counter party's tax responsibilities.

 

[Maxwell]

I purchased DVC in 1999. I have never taken the property tax deduction as part of my annual dues. Can I go back and take the deduction for all prior years?

 

[supersnoop]

I purchased DVC in 1999. I have never taken the property tax deduction as part of my annual dues. Can I go back and take the deduction for all prior years?

You'd have to file an amended return for each year. I believe you can only go back a few years.

 

[ustasmom]

I thought that it was deductible in the year that it was paid. So technically the seller most likely paid 2015 in 2014. Likewise, I paid 2016 taxes in 2015.

 

[LisaS]

I thought that it was deductible in the year that it was paid. So technically the seller most likely paid 2015 in 2014. Likewise, I paid 2016 taxes in 2015.

Members paid 2015 Estimated Property Taxes as part of their 2015 dues, either in full in January 2015 or monthly throughout 2015. At the end of 2015 DVC sent out the 2016 dues bill. Included in that bill is a line item stating the 2015 Actual Property Taxes that were paid to the taxing authority some time in 2015. I should state that all of the contracts I own are for WDW resorts. Things may be different for HHI, VGC or Aulani.