A Brief Overview of the Prepay Property Tax Rules

Today's post comes from:
Nadia Nejaime, Esq. 
Realtor, Licensed in DC, VA & MD

There are many changes to the tax code that will impact just about every tax payer, but in different ways depending on where you live, your income levels, your marital status, etc.  

One change that has received much attention is the limitation on the ability to deduct State & Local Taxes ("SALT") from your federal taxes.  SALT includes state and local income taxes, real property taxes, state sales taxes, etc.  Prior to the TCJA, SALT deductions generally were not limited.  Under the TCJA, beginning in 2018, taxpayers will only be able to deduct up to $10,000 for SALT.  This change is especially impactful for taxpayers who would itemize their deductions and live in states with income taxes and higher real property taxes.   

So, since many will not be able to deduct the full amount of their SALT in 2018 with the new limitation, some are evaluating whether or not they can and should prepay their 2018 real property taxes in 2017 in order to take advantage of that full deduction one last time before it is limited.

Since the TCJA was only signed into law very recently, whether or not prepayment of 2018 real property taxes in 2017 would be permitted or helpful has been an open question, with different voices coming to different conclusions.  Realistically, it still may not be a fully settled question.  But on Wednesday, the IRS did come out with an Advisory to help to clarify under what circumstances prepaid real property taxes may be allowed to be deducted on 2017 tax returns.   

The IRS advisory stated that "In general, whether a taxpayer is allowed a deduction for the prepayment of state or local real property taxes in 2017 depends on whether the taxpayer makes the payment in 2017 and the real property taxes are assessed prior to 2018.  A prepayment of anticipated real property taxes that have not been assessed prior to 2018 are not deductible in 2017."  

In DC, the DC government has stated that it does meet the allowed deduction criteria set out in the IRS Advisory and therefore, it would accept prepayment of 2018 real property taxes in 2017 (payable on line through Sunday; check the website for details).  They provided guidance on the DC.gov website on how to prepay these taxes.  Montgomery County appears to also be accepting prepayments.

Other jurisdictions - including Prince George's County - have indicated that prepaying taxes will not meet the IRS Advisory guidance, since the taxes have not yet been assessed for 2018.  It is critical that you research this for the jurisdiction in which you live and consult with your tax advisor, since prepayment may not always be accepted or helpful. And if you manage to prepay, but it is not deductible, it may be a challenge to obtain a refund. For some broad, general information, the Washington Post has been updating its site regularly to address how each of the local jurisdictions are coming out on this question.  

Also, if you are thinking of selling your home in 2018 and have prepaid the 2018 real property taxes, it is very important that you disclose this to potential buyers and include a provision in your sales contract to allow for the buyer to reimburse you for prepaid taxes, since the standard sales contract does not address this unique situation.  

Caveat:  We are not attempting to give you tax advice, since we are not tax experts and since everyone's tax situation will be different.  We strongly recommend you consult with your own tax advisor for professional guidance on this and all tax related questions.  But, we wanted to share some information on this topic since time is very short to determine whether you can and should prepay your real property taxes for 2018. We hope you find it helpful.

IRS Advisoryhttps://www.irs.gov/newsroom/irs-advisory-prepaid-real-property-taxes-may-be-deductible-in-2017-if-assessed-and-paid-in-2017
DC.gov:  https://otr.cfo.dc.gov/release/review-irs-advisory-prepayment-real-property-taxes-dec30

CNN Moneyhttp://money.cnn.com/2017/12/20/pf/salt-deductions-new-tax-plan/index.html

Washington Post:  https://www.washingtonpost.com/local/can-you-prepay-your-real-estate-taxes-before-the-tax-bill-takes-effect-find-out-here/2017/12/26/5539b14c-ea7c-11e7-8a6a-80acf0774e64_story.html?utm_term=.c2e6c22b612e