IRS Issues Advisory about Pre-Paying Property Tax

December 28, 2017

Because H.R.1, the new tax law, will cap the amount of state and local income and property taxes individuals can deduct on their 2018 returns, many taxpayers have been scrambling to prepay their property taxes in 2017, hoping to preserve a full deduction.

On December 27, 2017, IRS issued an advisory clarifying that there are limits to what property taxes can be prepaid and deducted. The advisory states that taxpayers may generally deduct in 2017 payments of property taxes that were assessed before 2018.  Prepayments of anticipated real property taxes that have not been assessed prior to 2018, however, are not deductible in 2017.  The advisory says that 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. The IRS then provides these two examples:

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.

Iowa property taxes, like many other jurisdictions, are paid in arrears. A timeline of the Iowa property tax process is available here. Note that assessment of properties (valuation of properties) is not the same as assessment of taxes. In Iowa, second half property taxes due March 31, 2018, were levied last March and the county authorities were authorized to begin collecting them last July. After that time, billing statements were mailed to the owners of record and they became liable for the tax. First half payments were due September 30 and second half payments were due March 31. Under this timeline, property taxes due March 31, 2018 were assessed in 2017 and could be properly paid and deducted in 2017. The IRS advisory would suggest, however, that prepaying taxes beyond that period would not result in a proper 2017 deduction.  

Important Note: H.R.1 does not cap the deductibility of property taxes incurred in a trade or business. These will continue to be fully deductible on a Schedule C, F, or E in 2018 and beyond.

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