IRS Weighs in on Deducting Prepaid Real Estate Taxes

Since the passing of the Tax Cuts and Jobs Act of 2017 taxpayers have been scrambling to take advantage of deductions that expire at the end of the year or are subject to limitation in 2018 and forward.  Much has been discussed in the tax community and on the internet about prepaying 2018 real estate taxes in 2017 to secure the deduction as a result of the $10,000 deduction cap effective January 1, 2018.

The IRS has just released two examples detailing what prepaid real estate taxes will be deductible for 2017 which will leave many taxpayers disappointed.

Deductibility hinges on whether or not the taxing authority has assessed the tax prior to the payment. Taxpayers hoping to prepay 2018 taxes that won’t be assessed until mid-2018 will not get a 2017 deduction for those taxes.  Here are the IRS 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 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