The Tax Cuts and Jobs Act of 2017 radically changed the US tax system with respect to deductible state and local income taxes, including real property taxes. Starting tax year 2018, real estate, person property, income taxes and sales taxes are deductible only up to $10,000. This means that people with high property taxes have a big problem – they have an expense that is no longer deductible. A question arises for tax attorneys – can these taxpayers use prepaid 2018 real property taxes to lower their 2017 tax liability?
This issue of prepaid 2018 real property taxes is the subject of the latest IRS advisory issued on December 27, 2017. Let’s explore this advisory in more detail.
Prepaid 2018 Real Property Taxes That Were Assessed and Paid in 2017
The IRS advised that prepaid 2018 real property taxes may be deductible in 2017 under specific circumstances. In particular, the IRS stated that, in situations where 2018 real property taxes were assessed and paid in 2017, such prepaid 2018 real property taxes may be deductible.
Prepaid 2018 Real Property Taxes That Are Not Yet Assessed But Paid in 2017
On the other hand, if your real property taxes for 2018 were assessed only in 2018, the prepayment in 2017 will not be 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.
Examples of Deductible and Non-Deductible Prepaid 2018 Real Property Taxes
The IRS provides the following examples of deductible and non-deductible prepaid 2018 real property taxes:
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 Sept. 30, 2017 and the second installment due Jan. 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.