On September 1,of the current year,Samuel,a cash-basis taxpayer,sells his cottage to Edward,also a cash-basis taxpayer for $100,000.Samuel's basis in the cottage is $65,000.The real property tax year is the calendar year.Real estate taxes on the property for the year are $3,650 and are payable on April 1 of the following year.The sales agreement does not provide for apportionment of real estate taxes between the buyer and seller.Assume Samuel pays all of the real estate taxes prior to the sale.The effects of this sales structure will be:

Question

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Because the sales agreement does not provide for apportionment of real estate taxes between the buyer and seller, Samuel, the seller, will have to pay the entire amount of $3,650. Since Samuel is a cash-basis taxpayer, he can only deduct expenses in the year they are paid. Therefore, he can deduct the full $3,650 as an expense for the current year. The sale of the cottage will result in a gain of $35,000 ($100,000 - $65,000). However, since Samuel paid the full amount of real estate taxes, there will be no adjustment to the purchase price, resulting in no effect on the gain. Edward, the buyer, will not be able to deduct any of the real estate taxes until the following year when he owns the property.

On September 1,of the Current Year,Samuel,a Cash-Basis Taxpayer,sells His Cottage