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Friday, December 29, 2017

Tax Deductions on 2018 Real Property Taxes Assessed and Prepaid in 2017

On December 27, 2017, the Internal Revenue Service advised tax professionals and taxpayers that 2018 state and local real property taxes paid in 2017 and assessed prior to 2018 are tax deductible in 2017. It is important to note that the real property taxes must be assessed and not merely estimated prior to 2018.

The IR-2017-210 Advisory further provides an example to illustrate: 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 2 installments, with the first due Sept. 30, 2017 and the second due Jan. 31, 2018. Assuming taxpayer has already paid the first installment, taxpayer may choose to pay the second installment on December 31, 2017 and claim a deduction for the prepaid taxes on taxpayer’s 2017 tax return.

However, as an additional example: County B also assesses and bills its residents for property taxes on July 1, 2017, for the period of July 1, 2017 – June 30, 2018. If County B allows its taxpayers to prepay property taxes for the 2018-2019 property tax year. Despite County B’s intention to make the usual assessment in July 2018 for the period of July 1, 2018 -June 30, 2019 and its acceptance of prepaid property taxes for the same period, such prepaid taxes are not tax deductible because they are not assessed until July 1, 2018.

The IRS Advisory contradicts Governor Cuomo’s Executive Order No. 172 which was signed on December 22, 2017. Executive Order No. 172 authorized local governments to immediately issue warrants to collect property taxes by the end of the year and consequently, allow New Yorkers to prepay their 2018 real property taxes in New York in 2017. Governor Cuomo’s intent was to allow New Yorkers to enjoy the tax deductible in 2017 and circumvent the GOP tax bill which set a $10,000 cap on state and local deductions.

Nonetheless, with the IRS Advisory being just that, an advisory and not a legal ruling, the issue of whether Governor Cuomo’s Executive Order No. 172 effectively allows taxpayers to enjoy tax deductions for prepaid 2018 property taxes is still left to be determined by a Tax Court as litigation is expected.