How do you calculate your property tax deduction for the house for the year of sale? The tax rules are quite strict on this matter. They require the deduction to be allocated based on days of ownership, regardless of how much of the tax the buyer or seller actually paid. Additionally, in some cases, the price of the home may have to be adjusted in connection with the allocation. The following examples illustrate how the rules operate.

 Example (1). Betty bought a house from Sally on February 7 for $200,000. The property taxes on the house (locally assessed based on the calendar year) are $3,650 annually. This works out to $10 a day. Sally paid the first quarter's tax bill on January 1st: $912.50 (1/4 of $3,650). On the date of sale, Betty reimbursed Sally for some of the taxes. Sally was only the owner for 37 days during the year of sale (31 in Jan. plus 6 in Feb.). (Note that the day of sale is counted as an ownership day of the buyer.) So Sally's tax obligation was only $370. Since she had paid $912.50, Betty should have reimbursed her for $542.50. On their tax returns, Sally deducts $370 in property taxes, and Betty deducts $3,280 (assuming Betty makes the remaining payments as they become due during the year) for the total year's taxes of $3,650.

 Example (2). The facts are the same as in Example (1) except that Sally isn't reimbursed the $542.50 by Betty at the closing for the extra property tax she paid. Sally has actually therefore covered the entire first quarter's property tax bill herself via her initial payment.

 In this case, however, Sally is still treated as only paying $370 in property taxes for her actual 37 days of ownership (calculated as above). And Betty still deducts the $3,280 (even though she pays only $2,737.50 (three payments of $912.50 each). That is: the deductions are based on the days of ownership of each taxpayer: 37 for Sally and 328 for Betty.

 Further, the $542.50 which Sally paid for Betty is treated as a discount from the sale price of the home. Thus, Betty's basis in the home (her cost for tax purposes) is not the $200,000 "sale price," but is instead $199,457.50 (which is $200,000 minus the $542.50 discount).

Note: In most cases, the parties will work out the proper reimbursement so that the scenario in Example (1) is more common.