I prepaid 2018 property taxes. Mistake?

Tax, SDIRAs & Cost Segregation

I prepaid 2018 property taxes. Mistake?

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

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
Originally posted by @Larry E.:

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?
Yes. If you prepaid 2017 taxes in 2016 - deduct them in 2017. If you prepaid 2018 taxes in 2017 - deduct them in 2018.
Where you're overthinking it is trying to analyze the poorly worded IRS instructions. They do not contradict my advice. :)
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Larry E.
Westborough, MA · Member since 2018 · 7 posts · 0 votes
8y
Originally posted by @Michael Plaks:

Originally posted by @Larry E.:
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?
Yes. If you prepaid 2017 taxes in 2016 - deduct them in 2017. If you prepaid 2018 taxes in 2017 - deduct them in 2018.
Where you're overthinking it is trying to analyze the poorly worded IRS instructions. They do not contradict my advice. :)
The IRS says
You say it's OK to deduct taxes in 2017 that were paid in 2016. This seems like a direct contradiction. Can you explain your reasoning or point me to information that would help me understand?
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Michael PlaksPro Member
Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
8y
@Larry E.
I can only repeat myself. And I did it twice already. Throw away the IRS instructions, seriously.
Yes, you can deduct 2017 taxes that you prepaid in 2016 on your 2017 return.
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Larry E.
Westborough, MA · Member since 2018 · 7 posts · 0 votes
8y
Originally posted by @Michael Plaks:

@Larry E.
I can only repeat myself. And I did it twice already. Throw away the IRS instructions, seriously.
Yes, you can deduct 2017 taxes that you prepaid in 2016 on your 2017 return.
No disrespect intended, but I consider the IRS instructions to be more authoritative than some guy on the Internet. It would be helpful if you could explain how you came to your conclusion, or point me to information corroborating your opinion.
If I throw away the IRS instructions I guess I can enter any number I feel like on every line.
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Michael PlaksPro Member
Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
8y
@Larry E.
I'm not "some guy." I'm a Federally licensed Enrolled Agent (EA) for 20 years, representing people in disputes with the IRS.
The IRS instructions are notoriously confusing. Interpreting them is very difficult, even for professionals. "Only taxes assessed and paid in 2017 can be deducted for 2017" prohibits premature deduction of 2018 taxes in 2017, not deducting 2017 taxes that were prepaid in 2016 but could not be deducted in 2016, due to the very same rule.
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Larry E.
Westborough, MA · Member since 2018 · 7 posts · 0 votes
8y
Originally posted by @Michael Plaks:

@Larry E.
I'm not "some guy." I'm a Federally licensed Enrolled Agent (EA) for 20 years, representing people in disputes with the IRS.
The IRS instructions are notoriously confusing. Interpreting them is very difficult, even for professionals. "Only taxes assessed and paid in 2017 can be deducted for 2017" prohibits premature deduction of 2018 taxes in 2017, not deducting 2017 taxes that were prepaid in 2016 but could not be deducted in 2016, due to the very same rule.
OK, so I shouldn't trust the IRS instructions. The code doesn't appear to be easier to interpret, but I'll give it a try. 26 U.S.C. § 164(a) says
and paragraph (1) is State and local, and foreign, real property taxes. Since my accounting method is cash method, doesn't "taxable year within which paid or accrued" mean the year in which I paid the tax? 26 U.S.C. § 461(a) General rule for taxable year of deduction seems to say that.
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Michael PlaksPro Member
Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
8y
@Larry E.
The Code, the Regulations, and the IRS instructions do not spell out every possible situation. Therefore, they are subject to interpretation. By the IRS, by tax professionals, by taxpayers and ultimately by courts.
Within the quoted context, it meant that you cannot deduct something BEFORE it's paid (under the cash method). Specifically, it says that you cannot deduct 2017 taxes in 2017 if you have not paid them until 2018. It prevents bending the rules in your favor: deducting something too early.
It was never meant to prevent the opposite effect: deducting something one year later than it was paid. This works in the government favor, and the government does not mind.
I'm not sure why you continue to argue. What are you trying to accomplish? You want to prove that you canNOT deduct 2017 taxes if they were prepaid in 2016? You know what - if it makes you more comfortable, then do not deduct them. It won't hurt anybody but you.
If someone does deduct them, and the IRS disagrees, then it's a job for people like me to prove them wrong - which we will do if necessary.
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Larry E.
Westborough, MA · Member since 2018 · 7 posts · 0 votes
8y
@Michael Plaks
I appreciate your patience in responding to my questions. Thank you.
I like to understand things, and I like it when things make sense. I like following rules and not cheating, but I like to question authority when it doesn't make sense. I like it when people defend a point of view with well reasoned convincing arguments rather than simply stating it as a fact.
You're telling me that I can pay an expense in one year and deduct it in a future year. This seems to blatantly contradict the tax code and the IRS instructions, so it's difficult for me to believe. You're saying that although the tax code and instructions say one thing, they mean another. But if the code intended to allow deducting an expense in the year it was paid or a future year, it would be easy to say that in the code and the instructions, but instead it says it must be the same year. It doesn't make sense that it would say something other than what it means when it would be easy to say the other thing.
It's not uncommon to find people on Internet forums saying things that are incorrect. Normally when I think that's happening I simply ignore them. But you seem to have some authority in the field, certainly more than me, a simple taxpayer with no training or experience fighting the IRS. So I've asked you to refer me to any information or the opinion of anybody else to corroborate your opinion and you haven't. You haven't defended your arguments with logic, you've just stated them as fact.
But now you have provided a logical argument. You're saying it makes sense because it benefits the treasury to allow me to deduct expenses in years other than when they were paid. But it seems like not allowing me to do that benefits them. I paid real estate tax in 2017. If my tax situation changes so deducting real estate tax on my 2017 tax return doesn't reduce my taxes but deducting it on my 2018 tax return would, I'd pay less total taxes if I'm allowed to deduct it in 2018 than if I'm not allowed to. If the IRS doesn't allow me to deduct it in 2018, they get more of my money, so the code as it seems to be written does benefit them.
You ask what I'm trying to accomplish with my questions. I'd like to be convinced that I can legitimately deduct expenses paid in 2017 on my 2018 tax return to reduce my income taxes. I'd like to gain a better understanding of how taxes work.
Do you often see cash method taxpayers successfully deduct expenses in one year that were paid in previous years because deducting them in the year they were paid wouldn't have reduced their taxes?
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Michael PlaksPro Member
Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
8y
@Larry E.
You cannot arbitrarily decide when to deduct, that's not what I am saying.
We're talking about a specific situation. I'm paying for something in Dec 2017, in this case it's 2018 taxes. The IRS says: you cannot deduct 2018 taxes in 2017, even if they're paid in 2017. OK. Then what happens with this expense? It is treated as if it was paid in 2018 when it could be deducted - in other words, delayed.
Not because you chose to do so, but because you were not allowed in the prior year. An exception to the general rule. And a very logical one.
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