🎯State and Local Deductions SALT Schedule A: 5 MCQs

Responses

1. 

   Justin Wedul 20 April 2024

   It appears that John did no pay any of the property taxes, so how can John deduct essentially 1/4 of the property tax?

   1. 

      Maroun, CPA 24 April 2024

      Hello Justin,

      The liability for the property tax is independent of who actually makes the payment. John became liable for the property taxes on January 1, as the tax liability starts with the calendar year. He remained liable for the portion of the year he owned the property, regardless of the fact that Dia paid the taxes later in the year.
      At the time of sale, such property tax liabilities are often settled through closing adjustments. This means that even though Dia paid the full tax amount, the purchase price might have been adjusted to reflect John’s share of the tax liability.

      Hope this makes sense!

2. 

   Denise Feng 22 August 2024

   In what situation would a taxpayer make an adjustment to their profit/cost basis? Additionally, I originally multiplied the taxes by 3/12 and did not see the answer I got and then assumed that the TP would adjust their profit by their portion of taxes and not deduct on Sch A. Is it more appropriate to use months or days? If it is days, why is it also common to use 360 instead of 365 days?

   1. 

      Maroun, CPA 27 August 2024

      Hello Denise,

      It is generally more accurate to prorate property taxes using days rather than months because it reflects the actual time the taxpayer owned the property more precisely. This method ensures that the prorated amount corresponds directly to the exact number of days of ownership, which is particularly important when the ownership does not align perfectly with the beginning or end of a month.
      Unless instructed otherwise, you have to use 365 days. The use of 360 days is common in some financial practices to make calculations easier, but for tax purposes, using 365 days is often preferred for its precision.

      I hope this helps!

3. 

   Denise Feng 22 August 2024

   I am still confused as to why Anna cannot deduct the $18,000 in interest if she used a home equity loan to acquire a second home. Does the loan need to be secured by the property being acquired with the loan in order for the interest to be deductible?

   1. 

      Maroun, CPA 27 August 2024

      Hello Denise,

      The confusion stems from the rules regarding mortgage interest deductibility. For the interest to be deductible on Schedule A, the loan must be a “qualified residence loan,” which means it has to be used to buy, build, or improve your primary residence or a second home, and importantly, the loan must be secured by the property that the loan is used for.

      In Anna’s situation, she used a home equity loan secured by her primary residence to purchase a vacation home. Under the current tax law, for the interest to be deductible, the loan must be secured by the property being purchased, built, or improved. Since Anna’s loan is secured by her primary residence but was used to purchase a different property (the vacation home), it doesn’t qualify as a deductible “home acquisition debt.”

      Therefore, because the loan is not secured by the vacation home (the property being acquired), the $18,000 interest paid on that loan is not deductible on Schedule A.

      I hope this makes sense!

4. 

   Lidiya Kovaleva 7 February 2025

   John didn’t pay property taxes. Dia payed the whole amount. Taxpayers are allowed to deduct property taxes if they payed them. Why John may claim property taxes if he paid nothing? According to the video he has to increase his profit by $1,664.38 and Dia has to increase her basis by this amount. Right? And the correct answer will be B.

   1. 

      Maroun, CPA 15 February 2025

      Hello Lidiya,

      You’re absolutely right to question this, and I appreciate the opportunity to clarify. For federal income tax purposes, the IRS treats property taxes as being allocated based on ownership days, regardless of who actually makes the payment. The seller is considered to have paid property taxes up to, but not including, the date of sale, and the buyer is treated as paying taxes from the date of purchase onward. This applies even if the actual payment is made by one party in full.

      In John and Dia’s case, John owned the property from January 1 to March 31, meaning he is responsible for his share of the annual property taxes. Even though Dia physically paid the entire $6,750 tax bill on June 1, the IRS deems John to have paid his prorated share, which is calculated as 90/365 × $6,750 = $1,664.38. As long as John itemizes his deductions, he can claim this amount on his Schedule A.

      Dia, on the other hand, cannot deduct the full amount because she is only responsible for the taxes from April 1 onward. Instead, she adds John’s portion ($1,664.38) to the basis of her home, increasing her cost basis for tax purposes.

      This rule ensures that each party deducts only their rightful share of real estate taxes based on ownership, regardless of who physically makes the payment. The correct answer remains $1,664.38, not $0, because tax law treats John as having “paid” his share, even though Dia was the one who made the actual payment.

      If you rewatch the video around the 9-minute mark, you’ll see that in the example provided, Professor Farhat explicitly mentions that the deduction is apportioned between the seller and the buyer, even though the seller (Stephanie) made the full payment. The buyer’s (Jason) basis in the property is adjusted because he is considered to have effectively purchased the property for $496,014 ($500,000 – $3,986) and reimbursed Stephanie for the $3,986 portion of the property taxes allocated to him. Even if Jason is not required to reimburse Stephanie under the sales contract, he is considered to have paid his share of taxes as part of the acquisition price and can deduct it on his return.

      I hope this helps!