On September 1, of the current year, James, a cash-basis taxpayer, sells his cottage to Bill, also a cash-basis taxpayer, for $100,000. James' 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 in November of the current year. The sales agreement does not provide for apportionment of real estate taxes between the buyer and seller. Assume Bill pays all of the real estate taxes in the current year. The effects of this sales structure will be:

Question

Quizplus · Accepted Answer

Since James is a cash-basis taxpayer and the sales agreement does not provide for apportionment of real estate taxes, James cannot deduct the $3,650 real estate taxes for the current year, since Bill paid them. Therefore, James will report a gain on the sale of the cottage of $31,350 ($100,000 - $65,000), and Bill will have a cost basis in the cottage of $100,000. The fact that real estate taxes are payable in November does not affect the tax treatment for the current year.

On September 1, of the Current Year, James, a Cash-Basis