IRS declares that 2018 Property Taxes Must Be Assessed and Paid in 2017 to Claim a Full Deduction

The IRS issued IR-2017-210 saying property taxes must be assessed and paid before 2018 in order to claim the deduction in 2017. “[W]hether 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,” the IRS said. “A prepayment of anticipated real property taxes that have not been assessed prior to 2018 are not deductible in 2017.” The IRS announcement comes as homeowners in high-tax states are lining up to prepay their 2018 property taxes before the deduction is capped at $10,000 starting in 2018. The change was included in the new tax law signed by President Trump on Dec. 22.

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. The IRS included examples of assessment, i.e. in the first example, County assesses property tax on July 1, 2017, for the period of July 1, 2017 through June 30, 2018. On July 31, 2017, County sends out notices to residents notifying them of the assessment and billing the property tax in two installments with the first installment due September 30, 2017 and the second installment due January 31, 2018. The IRS stated that assuming the taxpayer has paid the first installment in 2017, the taxpayer may choose to pay the second installment on December 31, 2017, and may claim a deduction for this prepayment on the taxpayer's 2017 return.

The new tax law allows taxpayers to deduct up to $10,000 of property taxes, and state and local income or sales taxes. The law previously placed no limit on the amount of state and local taxes that could be deducted. While the benefits for Arizonans is nominal, the change really hits taxpayers in states with high property taxes, such as New York and New Jersey.