Question

32. Bevis Bag Co. purchased a tract of land on August 31 of the current year, paying $225,000. Prior to the sale, the seller paid property taxes of $18,000 on the property. The taxes covered the calendar year period January 1 through December 31. a. Will Bevis be allowed to deduct any portion of the property taxes paid by the seller prior to the sale? If so, how much? b. What will be Bevis' tax basis in the land?

Answer 1

Ans 32
a) Bevis Bag Co. will be permitted to deduct only the portion of the property taxes incurred on or after the date of sale of the land. Since the land was purchased on August 31, Bevis Bag Co. is considered to have owned the land for 152 out of 365 days, thus $7,496 ($18,000 × (152365)) will be deductible by Bevis Bag. The remaining $10,504 in property taxes will be deductible to the seller of the land.

b) Bevis Bag Co.’s tax basis in the land would be $217,504 ($225,000-$7,496). The tax basis in he land will be reduced by the portion of property taxes that is permitted to be deducted by Bevis Bag Co, which is to be treated as being included as part of the selling price of the land.