Can I Claim a Prepaid Property Taxes Deduction?

October 24, 2018 : Nathan Rigney – The Tax Institute

Editor’s Note: This article was originally published on March 19, 2018. Although the IRS’s guidance on when they will or will not accept prepaid taxes continues to apply, this copy describes a situation that was unique to 2018 taxes paid in 2017.

 

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 Changed With Deductible Prepaid Real Estate Taxes in 2017?

The topic of prepaid property tax deductions gained attention at the end of 2017 due to 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, many taxpayers rushed 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 the large prepaid real estate taxes made at the end of 2017 were deductible and whether they’ll be deductible going forward.

Are Prepaid Property Taxes Deductible? Let’s Review the IRS’s Perspective

Let’s start with the IRS guidance on the topic. In general, whether a taxpayer is allowed a prepaid property taxes deduction for the prepayment of state or local real property taxes depends on whether the payment was made in a given year and the real property taxes were assessed in the same year.

For the scenario after tax reform was passed, prepaid real estate taxes were not deductible in 2017 if they had not been assessed prior to 2018. 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 provided 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 have denied 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 could have deducted that prepaid amount on your 2017 return as an itemized deduction.

Note: You can pay a 2018 tax bill that isn’t due until 2019 and claim a deduction for it in 2018. In that case, you’re not prepaying taxes; you’re simply paying your bill early.

Questions About the Prepaid Property Tax Deduction?

Again, while the tax reform incentive to take advantage of prepaid property tax deduction was a unique scenario for the end of 2017, you may still have questions about your property taxes. For instance, in any tax year, you may want to bundle or accelerate deductions in one year when itemizing is more advantageous than it will be the following year. However, IRS’s guidance on deducting prepaid property taxes remains the same.

Our knowledgeable Tax Pros can help. Visit one of our many offices to speak with an H&R Block tax professional today.

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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.