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IRS Issues Taxpayer Advisory on Prepayment of 2018 Property Taxes

The IRS announced yesterday, in IR 2017-210 (the “Advisory”), that state property taxes must be “assessed” in 2017 in order for such taxes to be prepaid in calendar year 2017 and therefore deductible in 2017. The Advisory says that state or local law determines whether and when a property tax is “assessed,” but the Advisory adds additional color, describing the term as “generally when the taxpayer becomes liable for the property tax imposed.” Changes to the tax law for the 2018 taxable year will cap at $10,000 an individual taxpayer’s deduction for state and local income and property taxes, and so the Advisory is intended to guide those taxpayers who may be considering prepaying 2018 property taxes before December 31, 2017 to take the deduction in the 2017 taxable year.

The Advisory provides two examples. In the first, a county assesses property tax on July 1, 2017 for the period July 1, 2017-June 30, 2018 and announces that the property tax may be paid in two installments, on September 30, 2017 and January 31, 2018. The example concludes that if a taxpayer prepays the second installment on December 31, 2017, that payment would be deductible in 2017 because the tax was assessed in 2017.

In the second example, a county assesses and bills its residents for property taxes on July 1, 2017 for the period July 1, 2017-June 30, 2018. The county intends to make the usual assessment in July 2018 for the period July 1, 2018-June 30, 2019 but permits residents to prepay their 2018-2019 property taxes in 2017 and has revised its computer systems to accept prepayment property taxes for the 2018-2019 tax year. The example concludes that taxpayers who prepay their 2018-2019 property taxes in 2017 may not deduct the prepayment in 2017 because the county will not assess the property tax for the 2018-2019 tax year until July 1, 2018. This second example generally describes the California system. Taxes for the period ending June 30, 2018 have been “assessed” and will be deductible if paid on or before December 31, 2017. The Advisory suggests that that California residents (and residents of other states and localities with similar systems) may not deduct taxes for the period beginning July 1, 2018.

It is unclear whether the executive order issued by New York Governor Andrew Cuomo (Executive Order 172, December 22, 2017) results in the assessment of property taxes in 2017, or merely authorizes their collection. It is possible that either the New York State government or the local property tax assessors will issue additional guidance in time to help taxpayers determine whether any 2018 property taxes have been “assessed” within the meaning of the Advisory. Taxpayers considering making prepayments in any jurisdiction (whether or not in New York) may wish to contact their tax assessors office to determine what property taxes have been “assessed” within the meaning of the Advisory.

Taxpayers should be aware that any benefit of prepayment may be lost if the prepayment would result in the taxpayer being subject to the alternative minimum tax. Additionally, prepayments in 2017 of state and local income taxes for 2018 are not deductible in 2017. Taxpayers who are considering prepaying any state and local taxes before the end of 2017 should consult with their individual tax advisers as to the consequences of such prepayments.

© 2019 Proskauer Rose LLP.

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About this Author

Stuart Rosow, Tax, Attorney, Proskauer Rose Law Firm
Partner

Stuart Rosow is a partner in the Tax Department and a leader of the transactional tax team. He concentrates on the taxation of complex business and investment transactions. His practice includes representation of publicly traded and privately held corporations, financial institutions, operating international and domestic joint ventures, and investment partnerships, health care providers, charities and other tax-exempt entities and individuals.

For corporations, Stuart has been involved in both taxable and tax-free mergers and acquisitions. His...

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David S Miller, Proskauer, derivatives issuance lawyer, cross border lending transactions attorney
Partner

David Miller is a partner in the Tax Department. David advises clients on a broad range of domestic and international corporate tax issues. His practice covers the taxation of financial instruments and derivatives, cross-border lending transactions and other financings, international and domestic mergers and acquisitions, multinational corporate groups and partnerships, private equity and hedge funds, bankruptcy and workouts, high-net-worth individuals and families, and public charities and private foundations. He advises companies in virtually all major industries, including banking, finance, private equity, health care, life sciences, real estate, technology, consumer products, entertainment and energy.

David is strongly committed to pro bono service, and has represented more than 300 charities. In 2011, he was named as one of thirteen “Lawyers Who Lead by Example” by the New York Law Journal for his pro bono service. David has also been recognized for his pro bono work by The Legal Aid Society, Legal Services for New York City and New York Lawyers For The Public Interest.

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Martin T Hamilton, Tax Attorney, Proskauer Rose Law Firm
Partner

Martin T. Hamilton is a Partner in the Tax Department, resident in the New York office. He primarily handles U.S. corporate, partnership and international tax matters.

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