Prepaid 2018 Real Property Taxes Are Deductible in 2017 If Assessed and Paid in 2017

(Parker Tax Publishing January 2018)

The IRS is advising taxpayers that 2018 state and local real property taxes prepaid in 2017 may be deductible if the 2018 taxes are assessed in 2017. However, a prepayment of anticipated real property taxes that have not been assessed prior to 2018 are not deductible in 2017. IR-2017-210 (12/27/17).

As a result of changes to the deductibility of state and local property taxes on federal income tax returns that were made in the Tax Cuts and Jobs Act of 2017 (TCJA), and which are effective beginning in 2018, the IRS has received a number of questions from the tax community concerning the deductibility of prepaid real property taxes. TCJA imposes a $10,000 limit on the deduction for state and local taxes (SALT). There is no limit on the amount of the SALT deduction under pre-TCJA law, which remains in effect until December 31, 2017.

According to the IRS, whether a taxpayer is allowed a deduction for the prepayment of state or local real property taxes in 2017 depends on whether the taxpayer makes the payment in 2017 and the real property taxes are assessed prior to 2018. A prepayment of anticipated real property taxes that have not been assessed prior to 2018, the IRS said, are not deductible in 2017. State or local law determines whether and when a property tax is assessed, which is generally when the taxpayer becomes liable for the property tax imposed.

The IRS provided the following examples:

Example 1: Assume County A assesses property tax on July 1, 2017, for the period July 1, 2017 - June 30, 2018. On July 31, 2017, County A sends notices to residents notifying them of the assessment and billing the property tax in two installments with the first installment due September 30, 2017, and the second installment due January 31, 2018. Assuming taxpayer has paid the first installment in 2017, the taxpayer may choose to pay the second installment on Dec. 31, 2017, and may claim a deduction for this prepayment on the taxpayer's 2017 return.

Example 2: County B also assesses and bills its residents for property taxes on July 1, 2017, for the period July 1, 2017 - June 30, 2018. County B intends to make the usual assessment in July 2018 for the period July 1, 2018 - June 30, 2019. However, because county residents wish to prepay their 2018 - 2019 property taxes in 2017, County B has revised its computer systems to accept prepayment of property taxes for the 2018 - 2019 property tax year. Taxpayers who prepay their 2018 - 2019 property taxes in 2017 will not be allowed to deduct the prepayment on their federal tax returns because the county will not assess the property tax for the 2018 - 2019 tax year until July 1, 2018.

There are several situations in which prepaying 2018 property taxes in 2017 won't produce a tax benefit, even if the prepayment is deductible. For example, some high-income taxpayers may see the benefit reduced or phased out entirely by the Pease limitations, or negated by the alternative minimum tax (state and local taxes are added back in in calculating alternative minimum taxable income). Taxpayers who don't have enough deductions to itemize in 2017 will receive no tax benefit from prepaying, and may even be forfeiting a valuable 2018 deduction if they go from taking the standard deduction in 2017 to itemizing in 2018.

Observation: In contrast to prepayments of 2018 property taxes, which are deductible under certain conditions discussed above, prepayments of 2018 state and local income taxes by individuals are not deductible in any scenario. TCJA includes a provision that specifically blocks taxpayers from deducting such prepayments in 2017. Taxpayers may, however, claim a 2017 deduction for paying the remainder of their estimated 2017 state and local income taxes before year-end.

For a discussion of the deductibility of state and local income and property taxes, see Parker Tax ¶83,100.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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