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2017 deduction for prepaid 2018 real property tax – only if tax assessed and paid in 2017

In an Information Release, IRS has stated that a prepayment of real property taxes is deductible in the year of prepayment,, e.g., 2017, only if the property tax is assessed in the year of prepayment.

Background. One of the provisions of the Tax Cuts and Jobs Act (Act) that President Trump signed into law on December 22 limited post-2017 annual deductions for real property and other state and local taxes to a maximum of $10,000. (Code Sec. 164(b)(6), as amended by Act Sec. 11042) Another Act provision increased the standard deduction for 2017 and thereafter. (Code Sec. 63(c)(7), as added by Act Sec. 11021(a)) As a result of these two changes, many taxpayers will not get a full benefit for their 2018-and-later payments of nonbusiness real property taxes.

IRS sets out rules. IRS has now announced that a prepayment of real property taxes is deductible in the year of prepayment,, e.g., 2017, only if the property tax is assessed in the year of prepayment. 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.

IRS provides the following illustrations:

Illustration: Assume County A assesses property tax on Jul. 1, 2017 for the period Jul. 1, 2017 – Jun. 30, 2018. On Jul. 31, 2017, County A sends notices to residents notifying them of the assessment and billing of 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.
Illustration: County B also assesses and bills its residents for property taxes on Jul. 1, 2017, for the period Jul. 1, 2017 – Jun. 30, 2018. County B intends to make the usual assessment in Jul. 2018 for the period Jul. 1, 2018 – Jun. 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 Jul. 1, 2018.
RIA observation: As noted above, the application of the above rules depends on state or local law. Recently, many states and municipalities have publicized their laws and, in certain cases, have taken actions to create new laws to permit 2017 prepayments. For example, New Jersey Governor Christie issued an executive order on Wednesday, December 28th that requires that all municipalities in New Jersey permit homeowners to prepay 2018 property taxes, as long as the payments are postmarked by the end of the year. And, New York Governor Cuomo, on December 22, issued an emergency Executive Order that authorizes local governments to immediately issue tax warrants for the collection of 2018 property tax payments.
RIA caution: Taxpayers who would be paying alternative minimum tax (AMT) for 2017 without consideration of any prepaid property tax will get no 2017 tax reduction by prepaying any portion of their 2018 property tax, because state and local taxes are an addback in the calculation of AMT income. And, taxpayers who would not be paying AMT for 2017 without consideration of any prepaid property tax may, by prepaying property tax, cause themselves to pay 2017 AMT, and, as a result, not get a full deduction for their prepaid property taxes.
RIA caution: Note that the ability to deduct and pay 2018 property taxes in 2017 does not apply to 2018 state and local income taxes. Code Sec. 164(b)(6), as amended by Act Sec. 11042, provides that a taxpayer who, in 2017, pays an income tax that is imposed for a tax year after 2017, can’t claim an itemized deduction in 2017 for that prepaid income tax.

References: For deduction for real property taxes, see FTC 2d/FIN ¶  K-4504; United States Tax Reporter ¶  1644.08.

IR 2017-210

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