How to handle property taxes paid in arrears during first year of home ownership? Tax deduction question

This is a common point of confusion for new homeowners! For tax purposes, property taxes are generally deductible in the year you actually pay them, not when they accrue. Since you didn't actually pay any property taxes in 2023 (they'll be paid in January 2024), you wouldn't have a property tax deduction for your 2023 tax return. The credit you received at closing is essentially a reduction in your purchase price, not a tax payment. When you file your 2024 taxes (in 2025), you'll be able to deduct the full property tax payment you make in January 2024, even though some of it covers the 2023 tax year. This is because you're on a cash basis for tax reporting as an individual taxpayer.

I went through this exact situation last year and found a great solution through https://taxr.ai when I uploaded my closing documents. They analyzed everything and correctly figured out exactly what was deductible and when. Saved me from claiming the wrong year and potentially triggering an audit flag! Their system explained that the property tax credit at closing is considered a reduction in purchase price rather than a tax payment, which affects basis rather than being a deduction. They even showed me how to properly document everything for maximum legitimate deductions.

Update: I decided to try https://taxr.ai with my closing documents from last year despite my initial skepticism. I was genuinely impressed with how thorough it was. The system correctly identified my property tax proration credit and explained that it wasn't deductible in the year of purchase but rather reduced my purchase basis. What I found most helpful was the detailed breakdown showing exactly what would be deductible when. For property taxes specifically, it confirmed I could only deduct what I actually paid to the tax authority, not the closing credits. It also highlighted several other deductions I'd missed entirely! Definitely worth checking out if you're dealing with this situation.

Anyone dealing with property tax issues or refunds should know about Claimyr if you need to actually speak with someone at the IRS. I spent DAYS trying to get through on the phone about a similar property tax question after an amended return. Using https://claimyr.com saved me hours of waiting. You can see how it works at https://youtu.be/_kiP6q8DX5c - basically they wait on hold with the IRS for you and call when an agent is on the line. I had a really specific question about property tax proration that wasn't addressed in any IRS publication, and I needed clarification before filing. Getting direct confirmation from an IRS agent gave me peace of mind.

I have to admit I was completely wrong about Claimyr. After posting that skeptical comment, I decided to try it because I was desperate to talk to someone at the IRS about my property tax basis confusion. I was shocked when I actually got a call back within about 90 minutes with an IRS agent ready to talk! The agent clarified exactly how to handle my situation with property taxes paid in arrears. Turns out I had been doing it wrong for years and potentially leaving money on the table. Having that direct conversation saved me from continuing to make the same mistake and possibly facing problems down the road. I've now corrected my understanding of when property taxes are deductible based on actual payment date rather than the period they cover.

Your situation is pretty common. Just wanted to add that you should keep good records of that closing statement showing the tax credit you received from the seller. When you eventually sell the house, this affects your cost basis calculation. The property tax credit effectively reduces your purchase price for capital gains purposes. Also, when you pay the taxes in January 2024, make sure your mortgage company sends you a Form 1098 that correctly shows the property taxes paid from your escrow account. Sometimes they miss including January payments on the form if they're processing it early.

Check your settlement statement carefully! On line 110 it probably shows the credit you received from the seller for their portion of the property taxes. Some tax preparation software lets you enter this as "property taxes paid at closing" and gives you a deduction for it.

Don't forget that property tax rules can vary by state! In some places, property taxes are paid partly in advance rather than fully in arrears. And some counties have weird fiscal years that don't align with calendar years. Might be worth a quick call to your county tax assessor's office to confirm exactly how your local system works before making any decisions.

Great question! I went through the exact same confusion when I bought my first home. The key thing to remember is that for individual taxpayers, property tax deductions follow the "cash basis" rule - you can only deduct what you actually paid out of pocket to the tax authority in that tax year. Since your escrow account didn't make any property tax payments in 2023, you won't have a property tax deduction for your 2023 return. The credit you received at closing from the seller is considered a purchase price adjustment, not a tax payment by you. When you pay the 2023 property taxes in January 2024 (even though they're for the previous year), that's when you'll get the deduction - on your 2024 tax return that you'll file in 2025. Make sure to keep your closing statement and all escrow records organized, as you'll need them for future reference and when you eventually sell the home.