Property Tax Deductions for 2017 May Not Include 2018 Prepayments
July 11, 2018
IRS Implies that Payments Made in 2017 for 2018 Real Property Taxes will not Result in a Property Tax Deduction for 2017
In Information Letter 2018-0009, the IRS has implied that actions taken in Dec. 2017 by the New Jersey Department of Community Affairs, which ordered NJ municipalities to accept payments for 2018 property taxes in the calendar year 2017, will not result in those payments generating 2017 federal income tax deductions.
One of the provisions of the Tax Cuts and Jobs Act (TCJA) limited post-2017 annual deductions for real property and other state and local taxes to a maximum of $10,000. Another TCJA provision increased the standard deduction for 2017 and thereafter. As a result of these two changes, many taxpayers will not get a full benefit for their 2018-and-later payments of nonbusiness real property taxes.
Code Sec. 164(b)(6), as amended by TCJA, provides that a taxpayer who, in 2017, pays an income tax that is imposed for a tax year after 2017, cannot claim an itemized deduction in 2017 for that prepaid income tax.
In December 2017, IRS announced that a prepayment of real property taxes is deductible in the year of prepayment, e.g., 2017, only if the property tax is assessed in the year of prepayment. (IR 2017-120) 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. In the pronouncement the IRS provided the following illustrations:
- Assume County A assesses property tax on Jul. 1, 2017 for the period Jul. 1, 2017 – Jun. 30, 2018. On Jul. 31, 2017, County A sends notices to residents notifying them of the assessment and billing of the property tax in two installments, with the first installment due Sept. 30, 2017 ,and the second installment due Jan. 31, 2018. Assuming taxpayer has paid the first installment in 2017, the taxpayer may choose to pay the second installment on Dec. 31, 2017 and may claim a deduction for this prepayment on the taxpayer’s 2017 return.
- County B also assesses and bills its residents for property taxes on Jul. 1, 2017, for the period Jul. 1, 2017 – Jun. 30, 2018. County B intends to make the usual assessment in Jul. 2018 for the period Jul. 1, 2018 – Jun. 30, 2019. However, because county residents wish to prepay their 2018-2019 property taxes in 2017, County B has revised its computer systems to accept prepayment of property taxes for the 2018-2019 property tax year. Taxpayers who prepay their 2018-2019 property taxes in 2017 will not be allowed to deduct the prepayment on their federal tax returns because the county will not assess the property tax for the 2018-2019 tax year until Jul. 1, 2018.
On December 27, 2017, then New Jersey Governor Chris Christie issued Executive Order 237 essentially requiring municipalities to accept payments for 2018 property taxes in the calendar year 2017, and to credit payments postmarked on or before Dec. 31, 2017, as received in the calendar year 2017 (NJ Order). The state agency charged with implementing the NJ Order, the New Jersey Department of Community Affairs, issued a similar requirement in Local Finance Notice 2017-28. The NJ Order cites existing New Jersey law that permit taxes to be received and credited prior to the dates otherwise fixed for payment. That law is N.J. Rev. Stat. §§ 54:4-66(e) and 54:4-66.1(f), which provide that taxes may be received and credited as payments at any time, even prior to the dates hereinbefore fixed for payment, from the property owners, their agents, or lien holders.
In February 2018, New Jersey Attorney General Gurbir Grewal wrote IRS, arguing that New Jersey taxpayers who paid 2018 property taxes on or before Dec. 31, 2017, should be eligible for deductions in 2017 and asking IRS to confirm that analysis. Pointing to the NJ Order and the Local Finance Notice, he said that “State statutes, executive orders, and agency notices are clear that residents may satisfy property tax assessments in advance and payments must be credited at that time. I see no basis for the IRS to refuse to do the same.” He also noted, “…while the TCJA did establish that income tax prepayments should be credited in 2018, that law did not impose the same rule on property tax prepayments. And so, relying on the text of the law, thousands of New Jersey taxpayers rushed to pay their taxes in order to qualify for the SALT [state and local tax] deduction.”
In a letter to the New Jersey attorney general, the IRS has implied that it disagrees with his position. The IRS noted that, before the passage of the TCJA, IRS has consistently taken the position during examinations that the deduction for state and local real property taxes is allowable as long as the tax is both paid and imposed (or assessed) in the tax year. The IRS said that on the rare occasions this position has been challenged, courts have upheld IRS’s interpretation. See Estate of Hoffman, 87 AFTR 2d 2001-2119 (4th Cir. 2001 where the Court of Appeals for the Fourth Circuit upheld a Tax Court decision disallowing the deduction for a prepayment of property taxes because the tax had not yet been assessed.
In the letter, the IRS said that the TCJA did not change Code Sec. 164 relating to property tax prepayment. As such, IRS’s longstanding position remains the same and is reflected in IR 2017-120. Thus, if a state or local taxing jurisdiction imposed a tax on real property by the end of 2017, the amounts paid in 2017 are deductible on a taxpayer’s 2017 tax return. If the tax was not imposed by a state or local taxing jurisdiction by the end of 2017, the requirements for the deduction under Code Sec. 164 are not satisfied in that year, and the deduction is therefore not allowable in 2017.
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Do you have any questions? Would you like to discuss the matter further? If so, please contact me, Frank Brunetti, or the Scarinci Hollenbeck attorney with whom you work at 201-806-3364.