Prepaid Property Tax Debate Undecided

Just a few days shy from the 2018 tax deadline on April 17, and controversy surrounding the new tax law—the Tax Cuts and Jobs Act—is leaving multitudes of homeowners uncertain about whether they should claim their prepaid property tax deductions. The new law imposes a $10,000 cap on state and local tax write-offs (previously unlimited) for both single filers and married couples, leaving tax consultants and taxpayers searching for ways to make the most of the decreased cap before it takes effect in next year’s filing.

Interpretation of the new law has been varied. The ruling clearly states that state and local income taxes are not eligible for prepayment. With no mention of property taxes, many homeowners rushed to prepay in December; however, on December 27, the IRS released a statement, clarifying that prepaid taxes are only deductible under certain circumstances—homeowners cannot deduct the prepayment for property taxes that have not been assessed prior to 2018.

The IRS provided the following examples:

“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.”

“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.”

Not all tax experts agree, and several members of the Ways & Means Committee are petitioning the IRS for higher deductions of reasonable estimates, according to the Wall Street Journal. The issue has not been resolved across the board, but with a low audit risk due to limitations on IRS resources, some taxpayers are urging their tax preparers to claim the deduction without disclosing the write-off on the required IRS form (8275).

“There is no reason to believe that Congress made a mistake in omitting property tax prepayments, and there was certainly no basis for the IRS to substitute its own policy judgements that departs from the act of Congress, especially when the consequence of the IRS’s determination may have cost taxpayers millions of dollars,” states the Ways & Means Committee letter.

Stay tuned to RISMedia for more developments.

Dominguez_Liz_60x60_4cLiz Dominguez is RISMedia’s associate content editor. Email her your real estate news ideas at ldominguez@rismedia.com. For the latest real estate news and trends, bookmark RISMedia.com.

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