Nothing 'fishy' about paying prorated property taxes at closing

Sellers who have paid their annual property taxes in full usually are given a partial credit by the buyer when the transaction closes.

Q. I signed an agreement to purchase my first home in November, and the deal closed a few days ago. Although the seller had already paid this year's property taxes in full, the closing statement shows that I had to pay $971 for part of the bill through my closing expenses. This seems kind of fishy. Did the closing agent screw up or, worse, try to rip me off?A. No, there's nothing fishy here.It's customary for the closing attorney or escrow officer who oversees a sale to prorate the property-tax bill and issue a credit to the seller when the transaction is completed. The credit is based on the amount of time the buyer and seller occupy the property during the course of the county's fiscal year.Your seller essentially paid his property taxes several months in advance. Because he moved out before the fiscal year was up, he's entitled to a prorated refund of the amount he prepaid. If you look closer at the closing statement, your side of the sheet will show that you were debited $971 for the taxes, and the seller's side will show a $971 credit.Make sure that you keep your closing statement: Since you didn't write a personal check for your portion of the prorated tax bill, that document is the only evidence you have to show that you paid your fair share of the property taxes. The statement will come in handy if a problem later arises with the local assessor or tax collector, or if you deduct your share of the payment on your next federal income-tax return and subsequently get audited by the Internal Revenue Service.Q. My brother and I own a duplex. I live in the front unit, and he lives in the back, but now he wants to add another bedroom to his unit because he's planning to get married soon and eventually have kids. My brother wants me to pay for half of the construction work because we will split the profits 50-50 when we eventually sell, but I don't think I should have to pay for any of the construction costs because I obviously won't have use of his unit's new bedroom. What is a fair way to resolve this issue?A. This type of problem often occurs when two or more unmarried people own separate interests in the same property.I can understand why your brother wants you to pay for part of the construction - because the new bedroom will increase the value of the property, which in turn will bolster both of your profits when the two of you sell. But I can see your point of view also, especially because he's the only one who will benefit from the addition while the two of you remain in the duplex.Perhaps the fairest way to resolve this dilemma is to ask your brother to pay for the new bedroom himself, but agree that he will be fully reimbursed for his outlays when the duplex is sold. For example, if the new room costs $20,000 to build and the property is eventually sold for an $85,000 profit, the first $20,000 of the proceeds would go toward reimbursing your brother, and the remaining $65,000 would be split evenly between the two of you.This isn't a perfect solution, but it's probably as close to one as you can get. If you decide to adopt this plan, put it all down in writing before construction on the new bedroom begins - and consider including a provision that will let you personally veto any extras (such as fancy lighting fixtures or expensive crown molding) that you feel would be unnecessary.Q. Are dues paid to a local homeowners association tax-deductible?A. I get this question often, especially when readers who own a condominium, townhouse or co-op start thinking about the April 15 deadline for filing their federal income-tax return.If you live in the home yourself, the dues you pay to the homeowners association cannot be deducted on your upcoming return. But if you rent the property to someone else, the dues paid to the HOA can be deducted (along with all of the property's other operating expenses) to reduce or even eliminate the taxes owed on your rental income.bull; For a copy of the booklet "Using Your House as Shelter from the IRS," send $4 and a self-addressed, stamped envelope to David Myers/TAX, P.O. Box 2960, Culver City, CA 90231-2960.#169; 2010, Cowles Syndicate Inc.