This is a follow up to previous emails and Herbein tax blogs regarding the tax planning suggestion 
to prepay 2018 real estate property taxes in 2017.
MAJOR TAKE-AWAY
Based on recent information – including IRS guidance just issued on December 27, 2017 - we recommend the following with respect to the prepayment of 2018 real estate property taxes:
- If the taxpayer has received or can obtain an actual bill or assessment of the 2018 real estate property taxes due a pre-payment of those taxes in 2017 should be deductible. However, it is important to determine whether the taxpayer is subject to Alternative Minimum Tax (AMT), in which case prepay the tax in 2017 will not be beneficial.
- NOTE in some jurisdictions – such as NYC – taxpayers receive an assessment before year end
that is typically due in January. Pre-payment of this 2018 assessment in 2017 would be deductible in 2017.
- NOTE in some jurisdictions – such as NYC – taxpayers receive an assessment before year end
- If the taxpayer has not received an actual bill or assessment of 2018 tax and would be prepaying an estimate of the 2018 real estate tax due, then then 2017 prepayment of the estimated 2018 real estate property tax would not be deductible in 2017.
HOW WE GOT HERE
Tax planning suggestion – in reaction to the Tax Cuts and Jobs Act - to prepay 2018 real estate property taxes in 2017
Due to several provisions in recently enacted federal tax legislation – such as lower tax rates in 2018, higher standard deductions in 2018 and an overall limit of $10,000 on the amount of deductible state & local income and property taxes – there was considerable buzz among tax planners, including the Wall Street Journal and other major media sources, to suggest that in certain situations it may be advantageous for individual taxpayers to attempt to prepay their 2018 real estate property taxes.
The new federal tax law specifically prohibited a deduction for the prepayment of next year’s state and local income tax. However, since there was nothing in the new law prohibiting prepayment of real estate property taxes we, like other tax consultants, suggested that client consider making the prepayments. A copy of our Year End Tax Planning Idea, which was also posted on our website, is attached.
Inability of PA tax collectors to accept prepayments AND recent guidance from the IRS
Although the prepayment of real estate property taxes seemed like a good idea at the time – we soon discovered that, unfortunately, it was not possible to prepay property taxes in many PA jurisdictions. It was determined that none of the tax collectors in Berks County would accept prepayments, and although apparently Philadelphia would accept prepayments both Chester County and Montgomery County said NO.
Then, on December 27, 2017 the IRS published the attached advisory document regarding prepaid real property taxes. Based on this IRS advisory it appears that in order for a 2017 prepayment of 2018 real property taxes to be deductible in 2017 the taxpayer had to have received an actual bill or assessment of the 2018 tax due. Without an actual, not an estimated, bill or assessment the prepayment in 2017 would not be deductible in 2017.
CONCLUSION
Based on the above information, our current suggestion with respect to the prepayment of real estate property taxes is as follows:
- If the taxpayer has received or can obtain an actual bill or assessment of the 2018 real estate property taxes due a pre-payment of those taxes in 2017 should be deductible. However, it is important to determine whether the taxpayer is subject to Alternative Minimum Tax (AMT), in which case prepay the tax in 2017 will not be beneficial.
- If the taxpayer has not received an actual bill or assessment of 2018 tax and would be prepaying an estimate of the 2018 real estate tax due, then then 2017 prepayment of the estimated 2018 real estate property tax would not be deductible in 2017.
Also, during the preparation of 2017 returns, taxpayers will need to consider and address the deductibility of 2017 prepayments of estimated 2018 real estate property taxes that they made prior to issuance of the IRS advisory.
ADDITIONAL RESOURCES
IRS Advisory: Prepaid Real Property Taxes May Be Deductible in 2017 if Assessed and Paid in 2017Please contact Mark R. Shellenberger or Barry D. Groebel if you have questions.
