Are Prepaid Property Taxes Deductible

Dated: 04/06/2018

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Are Prepaid Property Taxes Deductible?


April 17 is the tax deadline, and tax advisers still can’t agree on whether prepaid 2018 property taxes can be deducted in full. Congress passed a tax reform bill late last year, capping write-offs for state and local taxes at $10,000 per return for single filers and married couples. 

The move set off a rush of homeowners at the end of the year to prepay their property taxes for 2018 ahead of the tax bill taking effect this year. 

The overhaul barred deductions for many prepayments of 2018 state and local income taxes, but it was silent on deductions of prepaid property taxes,” The Wall Street Journal reports. 

On Dec. 27, the IRS had warned prepaying owners that not all prepayments of 2018 property taxes would be deductible on 2017 returns. To be eligible for a write-off, the owners must have known their tax liability at the time of payment, the IRS stated. 

But some tax specialists disagreed with the IRS’ assessment that you can only deduct the portion that was known or determined at the time. Others argued you could still make the prepaid deductions as long as they were based on reasonable estimates. They assert that prior tax rulings and regulations support this argument too. 

If the amount is a reasonable estimate made in good faith, its deductible, asserts Stephen Baxley, who heads tax planning for Bessemer Trust, a multifamily office.

But other tax officials say they’re closely following the IRS’ guidance. “We think the amount due must be determined for a prepayment to be deductible,” says Brian Lovett, a certified public accountant with WithumSmith+Brown in New Jersey. 

Some accountants say they’re doing both. David Lifson, a CPA with Crowe Horwath, says he recommends clients deduct prepayments of known amounts. But he will allow a deduction of an estimate “if I feel the client understands the risk that the IRS will disagree.”

Source: “The Hot Debate: Can You Deduct Prepaid Property Taxes?” The Wall Street Journal (April 3, 2018) [Login required.]

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