Prepaid Real Property Taxes

One strategy to avoid the $10,000 limitation in 2018 is to prepay the 2018 property tax bills by December 31, 2017. Since the limitation is not in place during 2017, those taxpayers who are able to deduct the prepayment in 2017 will receive a deduction in 2017 that they may not otherwise receive in 2018. On December 27, the IRS issued guidance on the 2017 deductibility of these prepaid property taxes. The advisory notice issued by the IRS is linked below.

In general, according to the notice, a prepayment of anticipated real property taxes that have not been assessed prior to 2018 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. This will be a county by county or city by city analysis of whether or not the property tax is assessed.

Example 1

ABC county assesses property taxes on July 1, 2017, for the period July 1, 2017, through June 30, 2018. On July 31, 2017, ABC county sends notices to residents notifying them of the assessment and billing the property tax in two installments. The first installment due September 30, 2017, and the second installment due January 31, 2018. Assuming the taxpayer has already paid the first installment in 2017, the taxpayer may choose to pay the second installment on or before December 31, 2017, and may claim a deduction for this prepayment on the taxpayer’s 2017 tax return.

Example 2

DEF county assesses and bills property taxes on July 1, 2017, for the period July 1, 2017, through June 30, 2018. DEF county intends to make the usual assessment in July 2018 for the period July 1, 2018, through June 30, 2019. However, because county residents wish to prepay their 2018-2019 property taxes in 2017, DEF county 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.

Each taxpayer’s situation is different, so be sure to contact your trusted professional at RVG & Company if you have any questions.

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