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Prepayment Of  Property Tax


I'm not 100% sure that will be the case. It gets complicated for a bunch of reasons.


If total real estate taxes for the year 2018 exceed $10,000 taxpayers who can itemize in 2018 will only be able to deduct $10,000. If the amount of real estate taxes paid in 2018 are less than $10,000 they can deduct the difference in state and local income taxes or state and local sales taxes, up to a combined maximum of $10,000.


The only benefit to prepaying real estate taxes assessed in 2017 that would become due and payable in 2018 is if the combination of real estate taxes and state and local income or sales taxes for 2018 will exceed $10,000. For NJ residents that is the majority of taxpayers. Or if the taxpayer can itemize in 2017 but will not be able to itemize in 2018 due to the limitation and elimination of deductible expenses.

We have been told by Jake Foy that prepaying real estate taxes does not affect the deduction allowed on the NJ-1040. So state taxes is not an issue to consider.


If the anticipated combination of real estate and state and local income or sales taxes for 2018 is $13,000, and the taxpayer will be able to itemize in 2018, there would only be a potential tax benefit for $3,000 of prepayment.


Prepayment of real estate taxes in 2017 would also only be of benefit if the taxpayer was not already a victim of the dreaded AMT, or if the prepayment would result in becoming a victim of the dreaded AMT.

Obviously, the amount of the prepayment, if any, must be properly calculated. One should just not automatically prepay the 1st two quarters without doing the math.


A homeowner owes real estate taxes on his property regardless of when paid. If not paid in 2017 they will need to be paid in 2018. If a taxpayer prepays 2018 real estate tax payments in 2017 the worst case, if subsequent legislation forbids any prepayment or if the deduction is not allowed in audit, is that he/she will not be allowed the deduction for the prepayment. But he/she will not be “out of pocket” – he/she just paid a bill sooner than it was due. Best case is that the taxpayer gets a deduction in 2017 that provides an “in pocket” tax benefit, because paying the amount in 2018 would not have provided any tax benefit.


The Government is quite wise to what taxpayers will be doing to maximize their itemized deductions in 2017. What I read and seen thus far is mixed. Most tax professionals say if you pay your property taxes in 2017 for 2018 the amount of the prepayment will be attribute to the year it was intent for. That is my feeling as well and that is what is written in the new tax law although not specific to RE taxes.


Soon the IRS will be coming out with the Technical Corrections Act which will breakdown of the new tax law and how to apply it based upon Congress's intent Monitoring and tracking of prepaid RE taxes by Uncle Sam it is a whole other kettle of fish.


You need to check if your municipality will even accept prepayment of Property Tax certain ones are not and will not accept prepayment.


Next some high earning tax payers, by paying their 2018 RE taxes in advance, will get effected by the AMT (Alternative Minimum Tax) which may wipe any saving they were hoping to get or even pushing up their 2017 tax liability.


Then you have the method that RE taxes get calculated and paid. They are done by quarter starting after June each year. They are not the same exact quarters that we use rather 90 day periods other than March, June, Sept and Dec. The first 2 are actually assessed amount and the last two are estimated amounts. Because they are estimated they are not actual assessed amounts due for RE taxes and payments for the 2 estimated quarters can be thrown out as a deduction if your return gets audited by the IRS.


Then you have the townships and municipalities that will not take a full year advanced payment and because of the estimated calculation above. Some municipalities will record your prepayment as an over-payment. There is a difference between a prepayment of an assessed tax liability and an over-payment of an estimated assessment.


Finally, if your mortgage company pays your real estate taxes and you make an advanced payment you run the risk that they will mess up your escrow and you may be paying your 2018 RE taxes twice or chasing them to stop billing the escrow piece of your mortgage.


PS. This does not apply to rental real estate since all your property taxes will be deductible on the schedule E portion of your return.


I hope this give you a better understanding of the issues with the new tax law and taxpayers desire to prepay their State and local taxes.

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