Prepay Property Taxes? Nope

By Dave Fratello | December 29th, 2017

Because we live in weird times, for a couple of weeks here, people have been rushing to figure out if they could pay a bunch of taxes early.

Specifically, property taxes.

And you probably know the reason, but it is worth stating specifically: Thanks to the new federal tax law, property tax deductibility will be sharply reduced to $10,000 per year beginning in 2018.

So, what if you could swoop in and prepay your 2018 taxes before Dec. 31, 2017? Or more? Maybe you could take a vastly greater writeoff in the last, great year of full deductibility!

Alas, no.

First, it was the Los Angeles County Assessor's office tossing cold water. In a Dec. 26 statement posted online and emailed all over the place, the Assessor said:

"Property owners may not pre-pay their 2018-2019 property taxes in December 2017. The 2018-2019 property tax bills against which these pre-payments would be credited will not be generated and mailed until September/October 2018."

There was a little good news, though: The Assessor clarified that you could pay in full the 2017-18 bill (covering July 1, 2017-June 30, 2018) by Dec. 31, 2017. Nothing prevents you from paying a bill that you've already received, even if it's not "due" till next year. The second payment is due in February and late after April 10, but that one you could pay now.

The rationale is that you can prepay the second half of 2017-18 because it was assessed in 2017. You can look at it as paying half of your "2018" bill in 2017 and getting away with taking the deduction. And that's better than nothing.

Now the IRS has chimed in.

In a "guidance" memo posted Dec. 28 online, the IRS ruled out 2018 prepayments, but seemed to validate the LA County position:

"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. State or local law determines whether and when a property tax is assessed, which is generally when the taxpayer becomes liable for the property tax imposed."

But the IRS guidance suggests that every other novel solution, including any scheme to prepay the full year of 2018-19, or 2019-20, etc., is a nonstarter.

The governors of New York and New Jersey had recently issued executive orders expressly intended to allow state residents to prepay next year's property taxes in 2017, with the intention of giving those residents a deduction for their 2017 tax returns. (The NY gov memorably said that if people think he's trying to "circumvent" the new tax law, "You're damn right I am.")

In those states and in Washington, D.C., and parts of Virginia, there was a similar phenomenon of residents clamoring to prepay taxes and finding willing local government officials happy to accept the money. People burned up the phones and lined up at tax offices with checkbooks in hand to try to get their 2018 payments in. There was less drama in California.

Now, anyone who thought themselves clever or who followed the advice of state and local authorities to prepay their 2018 taxes may find there is no benefit. In fact, some are already asking about refunds of their 2018 prepayments. (It's been a busy week since the tax bill became law.)

There are plenty of people stuck in limbo regardless.

If you purchased a home within the last few months, the updated property tax amount might not be assessed in 2017 (in the form of a supplemental bill).

This would mean any part of 2017 taxes could be stuck on the "old" amount, likely rooted to an older, lower assessed value. When the supplemental bill comes in 2018, including any portion covering Jan.-June 2018, it simply cannot be paid in time to get the deduction that others are getting by paying in 2017.

Is it a little bit unfair to new buyers? Sure. But soon enough, everyone will be in the same boat.

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