Real Estate Sales Tax

By whom? Certainly not by you as the seller. Perhaps by the agents.

You say a "residential property". This could be either a personal residence or rental property.

Certainly if the tax were imposed on the agents and therefore not on you, it would not be deductible on schedule a. Perhaps it is listed on the settlement sheet as a charge to you, the seller. In this case it would factor in reductions in sale value, thus lessening your gain to be reported to IRS. Of course if it was a personal residence, you might not even be reporting gain if it's under 250,000$.

ChEAr$, Harlan Lunsford, EA n LA

It reduces your net proceeds on the sale which means in decreases your gain on the sale or increases your loss.

If it was a personal residence any loss is NOT deductible. Any gain MIGHT be reduced by the Section 121 exclusion.

The transfer tax is NOT deductible as a separate item on your tax return.

Deductability of expenses/taxes generally falls on the person who paid them. Since I have a HUD-1 that shows that I (the seller) paid those taxes, it would follow that if they are deductable, I would be the person to take the deduction.

It's a somewhat unusual situation as most states have sales taxes. A few, including this one, have a goods & services tax, which is much more broadly applied.

I suspect it will only be deductible if I opt for the sales tax deduction instead of the income tax deduction.

The identity of the payer was missing from the OP.

Also new information. In the OP, it was a "gross receipts" tax, which is a form of income tax, not sales tax.

Correct. Plus it must be a "general" tax, as opposed to the transfer taxes that you (or the buyer) may also have paid. Is there a general rate for sales of goods and services? That would be the amount that would be deductible as sales tax.

If you don't take the sales tax deduction for the year in question, the tax paid would add to your basis.

What basis? He's selling the property, not buying it. I would add it to the cost of the sale.

What state are we talking about here? New Mexico? Hawaii? Washington?

It may make a difference.

Katie in San Diego

"Phil Marti" wrote in news:O_Pkj.21415$8A4.11808@trnddc02:

My wife is a commissions-based real estate agent in such a state (Hawaii). It has been the custom in the past that the Gross Excise Tax (which she is liable for, not seller) is included in the customary 6% commission. There has been an effort by the company (and no doubt others) to separately list the Gross Excise Tax, as is permitted by Hi DoTax for retail transactions, resulting in a commission (in this case the 3% due to each broker/agent) plus the 4.5 % (actually 4.71 because it's inclusive) GET. It's really just a way to increase commissions. There is a provision in the IRC for itemizers who elect to deduct state sales tax to count the GET when it is separately stated on a sales slip or invoice.

the costs of selling. For the buyer, it isn't clear to me (in some cases buyer signs a representation contract agreeing to pay the GET to buyer's agent). I suspect maybe the buyer could include it within the "sales tax" paid for sked A.

scott s. .

Yes.

The local custom seems to be for the agencies involved to pass the tax through to the seller, much as a doctor would charge a patient or a plumber a home owner. For example, if the charge for services was $100, the patient will pay $106. The tax will not be imputed to be within the $100.

Yes, clearly it could be considered a transaction expense along the lines of appraisals, seller warranties, last minute repairs, title costs, etc. What I was wondering is if there were special provisions for state sales taxes on the transaction.

For reasons I can't begin to divine I got the OP switched to the other side of the HUD-1 in my mind. Thanks for the catch. I agree that if not deducted as sales tax it's an expense of sale.

However, "add it to the basis" may have still been right. If a 1099-S is issued, it's not likely to reflect any expenses of sale, in which case I'd add all of them to basis rather than reducing the reported sale proceeds.

Repairs are not an allowable expense of sale.

What if this "residential property" is investment property and not personal residence?

ChEAr$, Harlan Lunsford, EA n LA

As you say. I thought there used to be an exception for repairs/cleanup done immediately prior to the sale, but in reviewing Pub 523, there is no mention of that.

========================================= MODERATOR'S COMMENT: And those fix-up costs went on the old Form 2119, which was retired effective May 7, 1997.

The New Mexico law is interesting because it is not technically a sales tax. It is really a gross receipts tax that is imposed on the seller. The seller is allowed to collect reimbursement of the tax from the purchaser, but is not required to do so, and such reimbursement appears to be a matter of contract between seller and purchaser. Even if the purchaser reimburses the seller for the tax, it is still the SELLER's tax; the purchaser is not the taxpayer.

As a result the tax is applicable, for example, to the gross receipts from sales to the U.S. Government or to an Indian tribe for services performed on the reservation. Even when the tax is passed through to the government or the tribe, it is not imposed on that entity, and therefore such a sale is not exempt from the tax. MESCALERO APACHE TRIBE v. NEW MEXICO, 625 F2d 967, 06/05/1980 (cert. denied).

So that made me wonder whether the tax you paid on the real estate agent's commission would be a deductible sales tax for federal income tax purposes. After all, it's not your tax liability; the agent is clearly the taxpayer. I think it is, oddly enough . IRC Sec.

164(b)(5)(B) defines a "general sales tax" as a "tax imposed at one rate with respect to the sale at retail of a broad range of classes of items." Notice it doesn't say who the taxpayer has to be, and the NM tax fits that definition. Sec. 164(b)(5)(G) says, "If the amount of any general sales tax is separately stated, then, to the extent that the amount so stated is paid by the consumer (other than in connection with the consumer's trade or business) to the seller, such amount shall be treated as a tax imposed on, and paid by, such consumer." So it appears that as long as the tax was separately stated on the closing statement, it's considered to be your tax liability, even though legally it is not yours.

So ... if you kept track of all the gross receipts tax reimbursements and compensating use taxes that you paid during the year, I think you could deduct them on Schedule A as sales taxes. However, you cannot add this item (the tax on the real estate commission) to the table amount; you'd have to have kept track of everything. (The services of a real estate agent are not among the items that can be added to the table amount.) Under the circumstances, while technically I think you could deduct it as a sales tax, you'd be better off to treat it as a cost of the sale (which it clearly is), reducing the gain or loss on the sale transaction. Of course, if this was a sale of your qualifying personal residence, the gain may be wholly or partially excludable under IRC Sec. 121, and any loss is not deductible.

Katie in San Diego

If it's a rental, fix-up repairs are deductible on Schedule E as repairs, not as a cost of sale.

If it's non-rental investment property, repairs would be a cost of maintaining it. Without looking it up, I'm not sure how that's treated, but my guess would be a Schedule A miscellaneous itemized deduction for investment expenses.

My point was to address the longstanding misconception that fix-up expenses prior to sale of a personal residence have ever (at least since 1971) been deductible. Many people got confused because of the old rules for deferring gain on such sales, which allowed you to consider these expenses in determining the required cost of the new residence, but didn't allow them in the calculation of gain.

(Incredibly comprehensive reply trimmed for space)

Wow. Thank you very much. That was exactly what I was looking for.

Rick, I'm not sure what you were looking for but nothing in Katie's response changes my response of January 20th. If the seller pays the tax, the tax reduces his proceeds on the sale of the property and thus, reduces his gain or increases his loss.

If the buyer pays the tax, the tax increases his basis in the property.

Real estate transfer taxes are NOT general sales taxes that are deductible (when the taxpayer elects state sales taxes instead of state income taxes) on schedule A.