Can I deduct prepaid property taxes?

March 19, 2018 : Nathan Rigney – The Tax Institute

Generally, real estate taxes are deductible in the year you pay them. However, rarely has the issue arose where a taxpayer pays property tax a year in advance.

 

What has changed?

Then came the Great SALT Limitation of 2018, a.k.a. the Tax Cuts and Jobs Act, which reduced the value of state and local tax deductions for two reasons:

  1. By increasing the standard deduction, which will make itemizing deductions less attractive for many taxpayers, and
  2. By capping the itemized deduction for combined state and local taxes paid at $10,000.

As Congress rushed to pass tax reform legislation in late December of last year, many taxpayers were rushing to prepay real estate taxes, often at the suggestion of elected officials.

A few days later, the IRS issued guidance that appeared to render many of those prepayments nondeductible. So, the question on everyone’s mind is whether they can deduct on their 2017 return that large property tax prepayment they made at the end of the year.

 

The IRS Perspective

Let’s start with the IRS guidance on the topic:

In general, 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.  Prepaid real estate 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. (IR-2017-210)

The IRS then provides two examples intended to clarify that the tax itself had to be known by the end of 2017 to be deductible on the 2017 return.

  1. Each county and municipality has its own method for appraising and billing property tax. If your local tax authority merely accepted prepayments prior to assessing or billing your 2018 property tax, the IRS may deny the portion of your 2017 itemized deductions that reflect your prepayment.
  2. On the other hand, if your local tax authority had already determined the amount of tax you would owe in 2018, you can deduct that prepaid amount on your 2017 return as an itemized deduction.

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If you paid your 2018 property tax in 2017 and you’re not sure whether you can deduct it on your 2017 return, a H&R Block tax professional can help you make the decision.

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Nathan Rigney – The Tax Institute

Nathan Rigney, JD, is a senior tax research analyst at The Tax Institute. Nathan specializes in state income tax trends and the taxation of real estate transactions and debt cancellation.