I prepaid 2018 property taxes. Mistake?

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I prepaid 2018 property taxes. Mistake?

Chris K.
Investor · Charlottesville, VA · Member since 2015 · 19 posts · 6 votes

So, following the near unanimous advice of everything I could find, because I have well over 10k in state and local taxes (and will likely opt for the standard deduction under the new tax bill), I went down to the City treasurer’s office today and prepaid my entire property taxes for 2018, like so many other people throughout the country, so I could deduct that payment on my 2017 return.  It was easy.  Although no assessment had yet been issued, the treasurer’s office said that “any overpayment will be refunded” if the assessment came in lower than I had estimated.

A few hours later, I received a push alert to my phone with a news article telling me that the IRS had said that you can only do this only in the limited circumstances where 2018 assessments have been issued in the calendar year 2017, which I’m sad to say, is not the case in my town in Virginia.  Assessments come out in January every year.

Surely I’m not the only person here in this situation.  Chalk it up to a bad break?  Or is this issue not yet over?  I can only imagine the people who have prepaid where property taxes are a lot higher.

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George SkidisPro Member
Rental Property Investor · Belleville, IL · Member since 2017 · 875 posts · 529 votes
8y

Since I own an income tax preparation business I will give you my opinion. We are still trying to figure this out for all of our clients but this is the most frequently asked question. Even the tax experts are still researching this. This is a personal opinion and should not be construed as professional advice. Consult your attorney or tax professional for further clarification sometime around the end of January when the IRS lets us know what the rules are for 2017.

The 2017 Illinois real estate taxes are not yet finalized. The amount owed will not be determined until all of the multipliers and tax districts are finalized. As such your real estate tax bill is accrued but not yet incurred. With extreme prejudice I doubt you can make this deduction.   In simpler terms you don't owe the taxes yet. You are in effect placing the funds for the tax payment in escrow with the local tax authority until the bill is due.

You could sign a 5 year lease and pay it all in up front. However, current IRS guidelines require you to amortize the expense over the life of the lease. There may be exceptions to the rule due to special taxing districts but this is the general outcome.

You amortize the cost of a rental dwelling over 27.5 years. It cannot be deducted in the year of purchase.

Since Illinois is broke they would love your interest free early real estate tax contribution. However, the influx of cash may be just the excuse Mad Mad Madigan needs to go on another spending rampage. Driving even more wage earners out of the state.

Unless your itemized Schedule A deductions for 2016 were well in excess of $24,000.00 it won't do any good anyway. The tax deductions for your personal residence are only deductible on schedule A

If you did not itemize on Schedule A you have no business considering this in course of action in the first place.

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  • Michael PlaksPro Member
    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
    8y

    @Chris K.

    The IRS did issue an announcement this afternoon suggesting that prepaid taxes not yet assessed will not be deductible. It is actually consistent with the tax law, so it's not too surprising.

    The worst that could happen to you is that you will have to push the deduction into 2018 and possibly lose it - which is what would have happened anyway if you did not prepay. In other words, at best you won. At worst you did not lose.

    I doubt this rule will be enforced, frankly. And more rules and clarifications can come later.

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  • Chris K.
    OP
    Investor · Charlottesville, VA · Member since 2015 · 19 posts · 6 votes
    8y

    Thanks @Michael Plaks.   I won’t quibble with you about whether it’s consistent, and I had read that there was some ambiguity there, but I think nearly everything I’ve read and researched recently suggested this was a wise move to make, even in the absence of an assessment. 

    Yes, I suppose the worst is that I gave the city an interest free loan as well.

    Out of curiosity, what makes you say that you doubt it will be enforced?  Are there really any clarifications to be made?  

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  • Michael PlaksPro Member
    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
    8y

    @Chris K.

    I was among many people who advised to prepay 2018 taxes. I did, however, insert a qualification to prepay taxes that are "currently due" - same as assessed. And it was before the IRS announcement. To be deductible, an expense needs to be both incurred and paid. Not assessed probably means not incurred, subject to fights over semantics.

    Why do I not expect it enforced? Because in my 20 years of representing people in IRS audits, I have never had IRS auditors verify whether a tax (or any other expense, for that matter) had been assessed. Only that it had been paid. Could they verify? Of course. But there is too much other stuff for them to worry about.

    Disclaimer: I'm not suggesting to ignore the rules. But the rules in this case leave room for interpretation.

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  • Jerome Hranka
    Investor · Bloomington, IL · Member since 2015 · 8 posts · 7 votes
    8y

    Can anyone clarify how the IRS advisory yesterday impacts states like Illinois where property taxes are paid in arrears?

    This is a slightly different situation than prepaying 2018 property taxes.  Homeowners in Illinois are just trying to get their 2017 property taxes (which are typically not assessed and paid until 2018) paid before year end.

    The IRS advisory starts off focused on prepayment of 2018 taxes, but the question is whether the assessment requirement would apply to prepaid 2017 property taxes as well.

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  • George SkidisPro Member
    Rental Property Investor · Belleville, IL · Member since 2017 · 875 posts · 529 votes
    8y

    Since I own an income tax preparation business I will give you my opinion. We are still trying to figure this out for all of our clients but this is the most frequently asked question. Even the tax experts are still researching this. This is a personal opinion and should not be construed as professional advice. Consult your attorney or tax professional for further clarification sometime around the end of January when the IRS lets us know what the rules are for 2017.

    The 2017 Illinois real estate taxes are not yet finalized. The amount owed will not be determined until all of the multipliers and tax districts are finalized. As such your real estate tax bill is accrued but not yet incurred. With extreme prejudice I doubt you can make this deduction.   In simpler terms you don't owe the taxes yet. You are in effect placing the funds for the tax payment in escrow with the local tax authority until the bill is due.

    You could sign a 5 year lease and pay it all in up front. However, current IRS guidelines require you to amortize the expense over the life of the lease. There may be exceptions to the rule due to special taxing districts but this is the general outcome.

    You amortize the cost of a rental dwelling over 27.5 years. It cannot be deducted in the year of purchase.

    Since Illinois is broke they would love your interest free early real estate tax contribution. However, the influx of cash may be just the excuse Mad Mad Madigan needs to go on another spending rampage. Driving even more wage earners out of the state.

    Unless your itemized Schedule A deductions for 2016 were well in excess of $24,000.00 it won't do any good anyway. The tax deductions for your personal residence are only deductible on schedule A

    If you did not itemize on Schedule A you have no business considering this in course of action in the first place.

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  • Natalie KolodijBusiness Member
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    Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
    8y

    @Chris K. Are you above the $10k for just your personal RE taxes and state taxes? 

    Rental properties aren't included. 

    IRS guidance is now that you can only deduct those RE taxes that were assessed in 2017- it varies county to county. 

    Podcast Guest on Show Pay Less Tax to the IRS This Year With THESE Real Estate Tax Strategies
    Kolodij Tax & Consulting
    WebsiteView Page
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  • Teague Anderson
    Rental Property Investor · Boulder, CO · Member since 2017 · 36 posts · 36 votes
    8y

    @George Skidis  You brought up something that keeps bouncing around in my head when I hear about people prepaying their taxes:  Can't you only deduct property taxes if you're itemizing?

    I feel like there are going to be a million people around the country who prepay their property taxes, but 900,000 of them who did it for nothing because they're taking the standard deduction.  After all, it would be hard to get up to and track $24,000 (if married) of personal deductions.

    Also, while you're here George... can you clarify a a couple other points?  This law won't affect the ability to deduct property taxes or mortgage insurance on rental properties, because those are expenses, right?

    Thanks for you brains.

    -Teague

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  • Chris K.
    OP
    Investor · Charlottesville, VA · Member since 2015 · 19 posts · 6 votes
    8y

    Yes.  That’s correct, it only would make sense to prepay your property taxes if you itemize.  The 24,000 standard deduction does not come into effect until the 2018 tax year, which is one of the reasons why everyone is rushing to pay their taxes this year, while they still itemize (or, also, pay more than 10K in SALT).

    1Reply
  • Kyle J.
    Rental Property Investor · Northern, CA · Member since 2012 · 5k+ posts · 5k+ votes
    8y
    Originally posted by @Jerome Hranka:

    Can anyone clarify how the IRS advisory yesterday impacts states like Illinois where property taxes are paid in arrears?

    This is a slightly different situation than prepaying 2018 property taxes.  Homeowners in Illinois are just trying to get their 2017 property taxes (which are typically not assessed and paid until 2018) paid before year end.

    The IRS advisory starts off focused on prepayment of 2018 taxes, but the question is whether the assessment requirement would apply to prepaid 2017 property taxes as well.

    Here’s the advice I got from my tax attorney in case it helps you:

    “The key to the legal ability to pre-pay property tax is the assessment date, also called the lien date. This is the date on which the value of real property is used to determine property tax liability.

    In order to deduct property tax on a 2017 federal tax return, the lien or assessment date must be prior to January 1, 2018.

    For Illinois- The assessment date is January 1st for the prior year, so any payments normally made in 2018 may be accelerated into 2017 and are deductible.”

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  • Michael PlaksPro Member
    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
    8y

    Your attorney seems to contradict himself. He first says "must be prior to 1/1" and then says "the assessment date is 1/1". English is my second language, but it sounds to me like "prior to" requirement is NOT met.

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  • Michael PlaksPro Member
    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
    8y
    Originally posted by @Teague Anderson:

    @George Skidis  You brought up something that keeps bouncing around in my head when I hear about people prepaying their taxes:  Can't you only deduct property taxes if you're itemizing?

    I feel like there are going to be a million people around the country who prepay their property taxes, but 900,000 of them who did it for nothing because they're taking the standard deduction.  After all, it would be hard to get up to and track $24,000 (if married) of personal deductions.

    Also, while you're here George... can you clarify a a couple other points?  This law won't affect the ability to deduct property taxes or mortgage insurance on rental properties, because those are expenses, right?

    Thanks for you brains.

    -Teague

    Correct - property taxes and mortgage interest for rentals are NOT affected 

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  • Kyle J.
    Rental Property Investor · Northern, CA · Member since 2012 · 5k+ posts · 5k+ votes
    8y
    Originally posted by @Michael Plaks:

    Your attorney seems to contradict himself. He first says "must be prior to 1/1" and then says "the assessment date is 1/1". English is my second language, but it sounds to me like "prior to" requirement is NOT met.

    I’m not an expert but I don’t see the contradiction. Another way of saying it is that the taxes must be assessed and paid prior to January 1, 2018. He goes on to state that the assessment date for Illinois is January 1, 2017 (which is prior to January 1, 2018). So that prong is met. 

    He then says if you accelerate (pay early) any payments due in 2018 (that were based on the January 1, 2017 assessment) prior to January 1, 2018 then they should be deductible. 

    That’s actually how my state (California) works and I just prepaid my next 2018 payment, which would have been due in April, so I can deduct it on my 2017 taxes. 

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  • Michael PlaksPro Member
    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
    8y
    Originally posted by @Kyle J.:
    Originally posted by @Michael Plaks:

    Your attorney seems to contradict himself. He first says "must be prior to 1/1" and then says "the assessment date is 1/1". English is my second language, but it sounds to me like "prior to" requirement is NOT met.

    I’m not an expert but I don’t see the contradiction. Another way of saying it is that the taxes must be assessed and paid prior to January 1, 2018. He goes on to state that the assessment date for Illinois is January 1, 2017 (which is prior to January 1, 2018). So that prong is met. 

    He then says if you accelerate (pay early) any payments due in 2018 (that were based on the January 1, 2017 assessment) prior to January 1, 2018 then they should be deductible. 

    That’s actually how my state (California) works and I just prepaid my next 2018 payment, which would have been due in April, so I can deduct it on my 2017 taxes. 

    Don't think so. The assessment date in IL is Jan 1, 2018 for the prior year - which is 2017. Until next week, 2017 IL taxes are NOT assessed - and therefore cannot be prepaid.

    That is how I read. I can see how it could be read differently, but I believe my reading is correct.

    0Reply
  • Chris K.
    OP
    Investor · Charlottesville, VA · Member since 2015 · 19 posts · 6 votes
    8y

    I agree @Kyle J. that’s what the attorney said, and I also agree with @Michael Plaks that’s a contradiction. But in any event, I hope said self-contradicting attorney is right, or at least right enough so that this will be allowed.  

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  • Michael PlaksPro Member
    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
    8y

    @Chris K. and @Kyle J.

    I also believe there is no risk to prepay EITHER way. If we eventually find out it is deductible in 2017 - great. If it turns out, after the dust settles, that it cannot be deducted in 2017 - then we deduct it in 2018.

    In other words, prepaying at least gives us a shot. Waiting and not prepaying robs us of that shot, for sure.

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  • George SkidisPro Member
    Rental Property Investor · Belleville, IL · Member since 2017 · 875 posts · 529 votes
    8y
    Originally posted by @Teague Anderson:

    @George Skidis  You brought up something that keeps bouncing around in my head when I hear about people prepaying their taxes:  Can't you only deduct property taxes if you're itemizing?

    I feel like there are going to be a million people around the country who prepay their property taxes, but 900,000 of them who did it for nothing because they're taking the standard deduction.  After all, it would be hard to get up to and track $24,000 (if married) of personal deductions.

    Also, while you're here George... can you clarify a a couple other points?  This law won't affect the ability to deduct property taxes or mortgage insurance on rental properties, because those are expenses, right?

    Thanks for you brains.

    -Teague

    0Reply
  • George SkidisPro Member
    Rental Property Investor · Belleville, IL · Member since 2017 · 875 posts · 529 votes
    8y

    Clarification. My earlier comment specifically stated it was about Illinois Real Estate Taxes.

    Real estate taxes for a personal residence are itemized on schedule A along with mortgage interest expense and other items of a personal nature. There is also a way to deduct R.E. Tax on a second or vacation home.

    Real Estate Taxes for Rental property are listed as an operating expense on Schedule E of the Tax return and are not impacted by the change.

    1Reply
  • Brandon Hall
    CPA · Raleigh, NC · Member since 2013 · 1k+ posts · 2k+ votes
    8y

    @Michael Plaks @Natalie Kolodij

    Can we really jump to conclusions that just because the IRS issued an advisory notice that property taxes must be assessed before they can be paid?

    I don’t think we can. An advisory notice is not precedent.

    Sec 461 says that accrual based taxpayers simply need a reasonable estimate in order to take a deduction. Should cash basis taxpayers be held to a higher standard?

    Sec 461-4(g)(1)(ii)(A) says that “payment” does not include a refundable deposit. Without a bill, you simply have a deposit, but the refundable aspect is what I’d question. If a taxpayer pays their tax assessor, that payment may not be refundable. Even if not yet assessed, I’d argue that it’s a deductible expense if the tax assessor collect payment. At that point, the taxpayer’s money is state property.

    If you are simply paying into a bank’s escrow account, then sure, non-deductible until funds are released from escrow.

    Rev Ruling 71-190 seems to support the notion that pre-payment of tax is deductible in the year paid.

    Otherwise, are Q4 state income taxes deductible if paid by the end of the year? Technically they aren't "assessed" until Jan 1 and payable on Jan 15. 

    Or what if my city assesses in March but I pay in Feb? Am I then disallowed a deduction for the estimated property taxes?

    How about other businesses expenses that are pre-paid such as dues, subscriptions, professional fees, etc?

    I think it's too convoluted to jump to the conclusion that the IRS is right.

    3Reply
  • Michael PlaksPro Member
    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
    8y

    I completely agree, @Brandon Hall. If my client deducted a prepayment, and the IRS disallowed it, I would certainly take such case to argue.

    1Reply
  • Chris K.
    OP
    Investor · Charlottesville, VA · Member since 2015 · 19 posts · 6 votes
    8y

    @Brandon Hall .  What’s that sound?Just the mike dropping.

    2Reply
  • Larry E.
    Westborough, MA · Member since 2018 · 7 posts · 0 votes
    8y
    Originally posted by @Michael Plaks:

    @Chris K. and @Kyle J.

    I also believe there is no risk to prepay EITHER way. If we eventually find out it is deductible in 2017 - great. If it turns out, after the dust settles, that it cannot be deducted in 2017 - then we deduct it in 2018.

    Sorry I'm late to the conversation. I had the impression I can only deduct property tax from my 2018 tax return that I pay in 2018. You're suggesting I can pay taxes in 2017 and deduct the amount in 2018. That would be good, because I prepaid in 2017 and now want to deduct the amount on my 2018 return instead of 2017.

    Is it likely my town will refund my prepayment and let me pay the amount due in 2018 this year?

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  • Michael PlaksPro Member
    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
    8y

    @Larry E.

    If you prepaid in 2017 and want to deduct in 2018 - nothing else to do. Just deduct in 2018.

    0Reply
  • Larry E.
    Westborough, MA · Member since 2018 · 7 posts · 0 votes
    8y
    Originally posted by @Michael Plaks:

    @Larry E.

    If you prepaid in 2017 and want to deduct in 2018 - nothing else to do. Just deduct in 2018.

    Form 1040 Schedule A instructions for Line 6 say:

    Doesn't that imply I can't deduct taxes paid in 2017 on my 2018 tax return?

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  • Michael PlaksPro Member
    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
    8y
    Originally posted by @Larry E.:
    Originally posted by @Michael Plaks:

    @Larry E.

    If you prepaid in 2017 and want to deduct in 2018 - nothing else to do. Just deduct in 2018.

    Form 1040 Schedule A instructions for Line 6 say:

    Doesn't that imply I can't deduct taxes paid in 2017 on my 2018 tax return?

    No it does not. Don't overthink it.

    0Reply
  • Larry E.
    Westborough, MA · Member since 2018 · 7 posts · 0 votes
    8y
    Originally posted by @Michael Plaks:

    No it does not. Don't overthink it.

    I'm really not trying to be difficult. I don't understand what you're saying. Would it be legitimate to deduct taxes I paid in 2016 on my 2017 return, even though the instructions say I can't?

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