Be Careful on Prepaying Property Taxes Before January 1, 2018

Published on: 23:39PM Dec 27, 2017

The IRS just released a Special Edition today that provides guidance on prepaying and deducting 2018 state and local property taxes in 2017.

The announcement states that prepaying these taxes in 2017 for 2018 property taxes will be allowed as a deduction if:
•The real property taxes have been assessed prior to 2018, AND
•The taxpayer pays the tax before 2018.

The IRS provided two examples as follows:

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.

Therefore, be very careful in deciding whether your local assessor allows for prepayment of taxes.  In example 2 above, the county allowed for prepayment for the 2018-2019 property tax, however, this tax would not be formally assessed until July 1, 2018.  In this case, there is no deduction allowed for prepaying the tax before 2018.

As has been mentioned in this post and by us in various media outlets, the restriction on deducting state and local property taxes only applies to your personal residence or other personal real property taxes.  You are always allowed to deduct 100% of real estate taxes on Schedule E, Schedule F or Form 4835 for assessed taxes.  These are "business" real estate taxes.  There has been no change in the deduction of these taxes.

However, the guidance that the IRS released regarding the timing of the deduction would still apply.  The deduction for any real estate tax is only allowed if it has been assessed.