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State & Local Taxation

Prepayment of Real Property Taxes

Berdon Tax Team 12.28.2017 | Client Alert

On December 27, 2017, the IRS issued IR-2017-210 (the Advisory), providing guidance on the deductibility for federal income tax purposes of prepaid property taxes.  The Advisory cautioned taxpayers that in order for prepayments of 2018 property taxes to be deductible, the 2018 property taxes must be assessed prior to 2018.

Background

The Tax Cuts and Jobs Act (the Act), signed last week by the President, imposes a $10,000 limit on the deductibility of state and local taxes (other than those incurred in a trade or business or for-profit activity).  The Act foreclosed the possibility of prepaying state and local income taxes; under the Act, tax payments relating to future tax years are considered paid in those future tax years.  The Act, however, imposed no such limitation on prepayments of property taxes, leading many taxpayers to seek additional state and local tax deductions in 2017 by prepaying 2018 property taxes.

Prepaid Taxes Must Be Assessed

The Advisory cautions, however, that simply making a prepayment of 2018 taxes in 2017 is not sufficient.  To be deductible, the Advisory notes that the 2018 taxes being prepaid must also have been properly assessed or levied, under state or local law, in 2017.  The Advisory gives two examples:

  • County A assesses property tax on July 1, 2017 for the period July 1, 2017 to June 30, 2018, notifies residents of the assessment, and provides for two installment payments, one due on September 30, 2017 and the second due on January 31, 2018.  Payments in 2017 of the January 31, 2018 installment will, according to the Advisory, be deductible.
  • County B also assesses property tax on July 1st for the July 1 to June 30 fiscal year and plans to assess tax for the July 1, 2018 to June 30, 2019 fiscal year on July 1, 2018.  Because taxpayers have sought to prepay the 2018-19 taxes, the County has enabled its computer systems to accept prepayments of that period’s taxes.  These prepayments, however, will not, according to the Advisory, be deductible because the 2018-19 assessment will not be made until July 1, 2018.

Many jurisdictions, particularly those in high property tax states, have sought to speed up the assessment process to facilitate prepayments.  In New York, for example, Governor Cuomo issued Executive Order No. 172 (the Order) authorizing local jurisdictions to issue warrants for the collection of a portion of 2018 taxes prior to 11:59 p.m. on December 28, 2017.

Consult Your Berdon Tax Advisor

Whether you should prepay your 2018 property taxes (assuming your local jurisdiction has properly levied all or a portion of 2018 taxes) depends on a number of factors and, ultimately, on your individual tax situation.  Depending upon your AMT position, for example, you may not realize the benefit of the prepayment because of the AMT add back for state and local tax deductions.  Consult your Berdon tax advisor both on the deductibility of a prepayment you are looking to make, as well as on whether prepaying your property taxes makes sense given your tax position.

If you have any questions about this Alert, please contact:

Wayne Berkowitz at 212.331.7465 | wberkowitz@BERDONLLP.com

Or contact your Berdon tax advisor.

 

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