Real Estate Taxes Deductible real estate taxes are any state, local, or foreign taxeson real estate levied for the general public welfare. The taxingauthority must base the taxes on the assessed value of the real estateand charge them uniformly against all property under its jurisdiction.Deductible real estate taxes generally do not include taxes chargedfor local benefits and improvements that increase the value of theproperty. See Taxes for local benefits, later. If you use an accrual method of accounting, you generally cannotaccrue real estate taxes until you pay them to the governmentauthority. You can, however, choose to ratably accrue the taxes duringthe year. See Election to ratably accrue, later. Taxes for local benefits.Generally, you cannot deduct taxes charged for local benefits andimprovements that tend to increase the value of your property. Theseinclude assessments for streets, sidewalks, water mains, sewer lines,and public parking facilities. You should increase the basis of yourproperty by the amount of the assessment. You can deduct taxes for these local benefits only if the taxes arefor maintenance, repairs, or interest charges related to thosebenefits. If part of the tax is for maintenance, repairs,or interest, you must be able to show how much of the tax is for theseexpenses to claim a deduction for that part of the tax. Example.cheap hotel in GranadaCity X, to improve downtown commercial business, converted adowntown business area street into an enclosed pedestrian mall. Thecity assessed the full cost of construction, financed with 10-yearbonds, against the affected properties. The city is paying theprincipal and interest with the annual payments made by the propertyowners. The assessments for construction costs are not deductible as taxesor as business expenses, but are depreciable capital expenses. Thepart of the payments used to pay the interest charges on the bonds isdeductible as taxes. Charges for services.Water bills, sewerage, and other service charges assessed againstyour business property are not real estate taxes, but are deductibleas business expenses. Denmark hotelsPurchase or sale of real estate.If real estate is sold during the year, the real estate taxes mustbe divided between the buyer and the seller. The buyer and seller must divide the real estate taxes according tothe number of days in the real property tax year (theperiod to which the tax imposed relates) that each owned the property.Treat the seller as paying the taxes up to but not including the dateof sale. Treat the buyer as paying the taxes beginning with the dateof sale. For this purpose, disregard the accrual or lien dates underlocal law. You can usually find this information on the settlementstatement you received at closing. If you (the seller) cannot deduct taxes until they are paid becauseyou use the cash method of accounting and the buyer of your propertyis personally liable for the tax, you are considered to have paid yourpart of the tax at the time of the sale. This lets you deduct the partof the tax to the date of sale even though you did not pay it. Youmust also include the amount of that tax in the selling price of theproperty. If you (the seller) use an accrual method and have not chosen toratably accrue real estate taxes, you are considered to have accruedyour part of the tax on the date you sell the property. Example.Al Green, a calendar year accrual method taxpayer, owns real estatein X County. He has not chosen to ratably accrue property taxes.November 30 of each year is the assessment and lien date. He sold theproperty on June 30, 1999. Under his accounting method he would not beable to claim a deduction for the taxes because the sale occurredbefore November 30. He is treated as having accrued his part of thetax, 180/365  (January 1-June 29), on June 30,and he can deduct it for 1999. Election to ratably accrue.If you use an accrual method, you can choose to accrue real estatetax that is related to a definite period ratably over that period. Example.John Smith is a calendar year taxpayer who uses an accrual method.His real estate taxes for the real property tax year, July 1, 1999, toJune 30, 2000, amount to $1,200. July 1 is the assessment and liendate. If John chooses to ratably accrue the taxes, $600 will accrue in1999 ($1,200 6/12, July 1-December 31) andthe balance will accrue in 2000. Separate elections.You can make an election for each separate trade or business andfor nonbusiness activities if you account for them separately. Onceyou elect to ratably accrue real estate taxes, you must use thatmethod unless you get permission from the IRS to change from thatmethod. See Revoking the election, later. Making the election.If you make your election for the first year in which you incurreal estate taxes, attach a statement to your income tax return forthat year. The statement should show all the following items. The trades or businesses to which the election applies andthe accounting method or methods used. The period to which the taxes relate. The computation of the real estate tax deduction for thefirst year of the election. Generally, you must file your return by the due date (includingextensions). However, if you timely filed your return for the yearwithout making the election, you can still make the election by filingan amended return within 6 months of the due date of the return(excluding extensions). Attach the election to the amended return andwrite "Filed pursuant to section 301.9100-2" on theelection statement. File the amended return at the same address youfiled the original return. If you make the election for a year after the first year in whichyou incur real estate taxes, file Form 3115. Generally, you must filethis form during the tax year for which the election is to beeffective. For more information, see the instructions for Form 3115. Revoking the election.To revoke an election to ratably accrue real estate taxes, fileForm 3115 during the tax year for which the change is requested.