The Taxes YOU Have to Pay on the Leased Property!

Did you know that you also must pay taxes on the property you are leasing?  The post for November 6, 2017 was about the different kinds of leases and some of the expenses that you will be responsible for, taxes being one of them.

Rachel is a spa owner and needs to figure out how much of the property taxes, paid to her landlord, she can deduct on her Schedule C, business taxes.  These property taxes are deductible, but when Rachel can deduct them will be determined by her method of accounting.

If Rachel used the cash method of accounting (explained on February 6), she would deduct the property taxes paid in the period that she paid the landlord for this expense.  Rachel moved into this location on January 1, 2017 and according to her lease, $400 of her total monthly rent is escrowed for taxes.  Since Rachel has been in this location for the entire year, she could deduct $4,800 because that is what was paid in 2017.  In the beginning of 2018, the landlord will determine if the $4,800 paid in was enough to cover the true expenses.  If it wasn’t enough, then Rachel will receive a bill for the remainder owed.  If the amount she paid in was more than her share of the actual expenses, she will get a refund.  In 2018, she will be able to deduct the $400/month + or – the reconciliation amount from the landlord in the beginning of the year.

Rachel uses the accrual method of accounting and if she has a liability for the taxes, she knows the amount and she has use of the property. She will be able to deduct the property taxes, however, the amount she deducts will be calculated a bit differently.  Rachel must review her lease to find out when she becomes liable for this expense.

Rachel’s landlord is liable for the property taxes beginning on January 1, 2017, but the tax bill will not be issued until February 2018.  Depending on the lease language, Rachel could be liable when the landlord becomes liable.  In that case, January 1st is the liability date and Rachel could deduct any property taxes for 2017, regardless of when its paid.  If the lease states that Rachel is not liable until the property tax bill is issued to the landlord, then Rachel would not be able to deduct the property taxes until the following year when the tax bill is issued.

If you are unsure about how to record the property taxes paid, contact us at info@excerebus.com or 407-988-5647.

Categories: Tax Information

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