Deduction of prepayment of real or personal property tax

Someone else who is single and itemizes today at $16,000, but the allowed pre-pay RE taxes will drop that down to $13,000, it doesn't give much if any tax advantage to pull that RE payment into 2017 since they will still exceed the new standard deduction amount of $12,000 for 2018, anyway.

In addition to the likely higher tax rate in 2017 than 2018 making the deductions valuable, remember too that a barely-itemizer has the potential benefit of reducing the amount of state income tax refund taxable under §111.

Just to be clear the service stated, "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." They don't reference when the tax is billed/due, but rather when the taxpayer is liable under state law. Supdat are you seeing something different?

Under Colorado Law the following is relevant:

39-1-105 Assessment Date
All taxable property, real and personal, within the state at twelve noon on the first day of January of each year, designated as the official assessment date, shall be listed, appraised, and valued for assessment in the county wherein it is located on the assessment date.

39-1-107 Liens
The lien of general taxes for the current year, including taxes levied pursuant to section 39-5-132, shall attach to all taxable property, real and personal, at 12 noon on the assessment date.

However residents of Colorado have one issue in common with Example B - "the assessor revised its computer systems to accept prepayment of property taxes".

When trying to make a prepayment the following error is displayed for Denver County:
Due to the preparation of the real property tax roll for next year, we are unable to accept online payments for real property taxes and business personal property taxes at this time. We anticipate that online payment will be available in early January.

The website also has the following:
Taxpayers often wish to prepay their property tax before the end of the year. The City and County of Denver does not know the amount of taxes due for a parcel until the mill levy is approved at the end of December. If you'd like to pay prior to this time, we recommend paying the tax amount from last year. You will be responsible for paying the difference once the mill levy is approved or you will receive a refund if you pay too much.

There is still the option to mail a check. Going back to Rev Rul 71-190 is the prepayment "made pursuant to specific provisions of State law authorizing such payments" So the debate continues. For taxpayers in Colorado they don't seems to fit within either example the IRS provided.

It is consistent with the NYS governor coming out and authorizing localities to "prebill" property 2018 taxes.

That might create a slight bit of certainty (but then again, it might not…because if it’s a pre-bill, it’s not a real assessment). The governor’s action seems to me to be consistent with the rule that applies to state income taxes…which is that the taxing authority agrees to accept the payment.

Hoffman has been mentioned in more than one thread. The Tax Court opinion here:

https://ustaxcourt.gov/InOpHistoric/HOFFMAN.TCM.WPD.pdf

…bases its conclusion on Hradesky (see Page 6). When you go to Hradesky, three cases are cited:

Motel Corp., 54 T.C. 1433, 1441 (1970); Eugene Vassallo, 23 T.C. 656, 664 (1955). See in particular Arthur T. Galt, 31 B.T.A. 930 (1934).

Interestingly enough, Motel Corp involved state income taxes. Vassallo involved excess profits tax – that the taxpayer didn’t even pay, because they were in dispute. And Galt involved the same situation as Hradesky – the taxes were deposited with a brokerage firm and weren’t even paid over to the taxing authority until a future tax year.

Other than that, does the above logic make sense?

No, it doesn’t.

Whow knew that this language could be so uncertain, "taxes shall be allowed as a deduction for the taxable year within which paid or accrued"

The “paid or accrued” language is with respect to accounting method, cash or accrual, as we know. And here’s from Sec 1.446-1 where the Cash Receipts and Disbursements method is explained:

Expenditures are to be deducted for the taxable year in which actually made.

The word “expenditure” is used, not expense. What we are evaluating here is an “amount paid” (i.e. an expenditure) for something. That something is “property tax.” IRS takes the position that if you make an expenditure for something that is not legally owed yet, that is a “deposit” of that something (i.e. a Prepaid), to be applied to that something at a later date, not an actual payment of that something. As such, IRS’ reading of the 164 statute would go like this:

“Assessed taxes shall be allowed as a deduction…”

In other words, as per the IRS, something can’t be a tax, as that word is used in the statute, until it is assessed as one. Until assessment, it’s not a tax, so it falls outside of Section 164, rendering it currently non-deductible. They might also say that while the taxpayer has made an “expenditure,” as that word is used in 1.446-1, it wasn’t an expenditure for a “tax,” as that word is used in Section 164. This reading, of course, flies in the face of case law regarding state income taxes. It also flies in the face of the 263(a) regulations. And it flies in the face of any prepaid business expense, as Sec 162 uses the word “expense.” Thus, if a cash basis business owner makes a 12/2017 expenditure for January, 2018 grass-cutting associated with his office building, it wouldn’t be deductible in 2017. IRS would assert that while this was a 2017 expenditure, it wasn’t an expenditure for an “expense,” as that word is used in Section 162.

In our county we pay in arrears (2017 paid in 2018) and the 2017 bill is sent out in 2018. However, the county allows prepayment up to 105% of the prior year bill. The county is acknowledging the liability by allowing prepayments and provides an estimate of how much that liability will be. The mere fact you own the home makes you liable. There's really no question about whether or not you're going to get bill. It's 100% certain. So, why does the actual receiving of the bill make a difference?

The existence of a bill doesn't matter, it's the existence of an actual calculated liability (i.e. tax warrant or assessed billable amount).

I just got back from my town office and paid mine. They gave me a stamped receipt showing the (future, to-be) bill number from the county tax rolls.

The city next to me is not ready due to the library district budget not being final yet, so all those folks will not be able to pre-pay. Although when I talked to the finance commissioner today he said a whole slew of them are pre-paying anyway just based on the estimate from last year. I told him I hope none of them are my clients because I will not take that position on a 2017 return.

Heck, a lot of folks in California include special assessments (not ad valorem) in their property tax deductions, have been for decades. A Form 1098 amount reported in Box 11 for real estate tax payments out of mortgage escrow account invariably includes the full amount. CA FTB tried a few years ago to force more detailed reporting on this, but got shot down.

Point being, I'm not going to perform any extra due diligence on this topic, beyond what I previously did under Circ. 230 rules, and clearly it is Congress' intent that IRS not have sufficient funding to investigate every single itemized deduction claimed on a tax return. I'm not doing their enforcement work for them.

makbo hit the nail on the head in regards to form 1098 reporting of R/E taxes. Also, think of treatment of the real estate tax adjustment on the sale of property being reported on a settlement statement.

Just to be clear the service stated, "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." They don't reference when the tax is billed/due, but rather when the taxpayer is liable under state law. Supdat are you seeing something different?

Where we are the assessed value of the homes are available. The property tax bills are not available and the tax hasn't been assessed. So, is the taxpayer liable for the taxes at this point? The county allows for prepayment up to a year in advance.

This is from the NYS Governor's website regarding executive order:

Authorizes Local Officials to Immediately Levy Taxes

The Governor authorized local governments to immediately issue warrants to levy property taxes by the end of the year. Officials should issue warrants for the collection of taxes and deliver them to the local tax collector immediately, and no later than 11:59 p.m. on Thursday, December 28, 2017.

This will allow New Yorkers to pay their property taxes for 2018 in the 2017 calendar year and allow localities to accept advance payment so that property owners can deduct the full amount of their payment at the federal level.

I would think that if the tax is warranted and levied, and the bill is dated in 2017, payment thereof in 2017 should qualify for the deduction.

All of this being said, we have been running numbers in my office, and it seems like most NYS residents that own property will already pay federal AMT for 2017, even without prepaying any 2018 property taxes. One caveat to that: If the resident is itemizing deductions for NYS purposes, they could potentially get a NYS benefit in 2017 for prepayment of 2018 taxes. Note that the NYS itemized deduction calculations uses federal itemized deductions as a starting point. Therefore, without a NYS law change, this change in the federal law will result in a lower itemized deduction for property taxes for NYS purposes for years 2018 and forward.

I would also point out that in the appeal of Hoffman (Hoffman still lost), the court made this comment:

Taxes which have not been actually assessed have not accrued.

Not sure why that’s relevant…but whatever. The Hoffman appellate court also referenced Lewis. In Lewis, it was stated:

Presumably, real estate taxes were paid on this home. A real estate tax is deductible by a cash basis taxpayer when the tax is paid. A mortgagor's payment to a mortgagee (or to an escrow account) is not payment; the payment occurs when the mortgagee (or escrowee) transmits the funds to the taxing entity. Hradesky v. Commissioner, 65 T.C. 87 (1975), affd. 540 F.2d 821 [ 38 AFTR 2d 76-5935] (CA5 1976). Petitioner does not claim that his mortgagee paid any real estate tax in 1971, he has not shown that he paid any real estate tax directly in 1971, and he does not assert that he is entitled to a deduction because of section 164(d). Further, petitioner has failed to place in the record any evidence from which we could conclude that any prepayment of taxes he may have made to his mortgagee represented actually assessed rather than estimated taxes. Hradesky v. Commissioner, 540 F.2d at 824. We conclude that petitioner is not entitled to any deduction for real estate taxes.

Note that Hradesky was cited twice here. The first time, it’s cited to tell us that paying “in” to an escrow account doesn’t create a deduction. We already know that. Then, Hradesky is cited again with the, “Further…”

Further, petitioner has failed to place in the record any evidence from which we could conclude that any prepayment of taxes he may have made to his mortgagee represented actually assessed rather than estimated taxes. Hradesky v. Commissioner, 540 F.2d at 824.

Why does this matter? If it’s already been established that paying “in” to an escrow account doesn’t give rise to a deduction, then it doesn’t matter if the taxes were assessed or not. What you can take away from this second reference to Hradesky in the Lewis case is that paying estimated taxes into an escrow account doesn’t give rise to a deduction. Ok, big deal.

Numerous cases cite Hradesky for the proposition that taxes must be assessed before than can be deducted by a cash basis taxpayer. That is really not what Hradesky was all about. It was about a guy who forwarded his property taxes to his mortgage company and his mortgage company didn’t remit them to the taxing authority until a future tax year. Galt was about the exact same thing, with a few twists. That case (Galt), however, involved Section 23(c) of the Old Code whereas Hradesky involved Sec 164 of the New Code. These cases were all about accounting method, timing, when payment was actually made, remitting to a third party, etc. There was no discussion that the word “tax,” as used in Section 164 contemplates an “assessed tax.” And there was no need for it either, because the taxes at issue were 1966 taxes that were paid in 1966 and 1967, respectively. This is from Hradesky:

The key is not whether payment is voluntary; rather, it is whether payment has been made by a cash basis taxpayer to the taxing authority.

And here’s another quote from Hradesky:

Respondent contends that since petitioner is a cash basis taxpayer, he may take a deduction only when the taxes are paid to the taxing authority.

So, what I see here is a bastardization of case law…continued references that certain old cases stands for a certain proposition, when, in fact, they don’t.

and clearly it is Congress' intent

Another clear intent of Congress is that prepaid state income taxes won’t be deductible. We can only surmise that Congress felt that the property tax playing field would be level, since taxpayers in all states pay them and can prepay them, local taxing jurisdictions permitting. But, in order to keep the state income tax field level, it would be unfair to permit a CA resident (for example) to deduct 2017 and 2018 state income taxes in 2017, when the FL resident cannot deduct his 2018 sales tax in 2017.

In IL it would seems residents are liable as of Jan 1.


(35 ILCS 200/9-175)
Sec. 9-175. Owner on assessment date. The owner of property on January 1 in any year shall be liable for the taxes of that year

Chicgocpa - is your experience different?

The IRS released this alert yesterday:

https://www.irs.gov/newsroom/irs-adviso ... id-in-2017

NY times article concerning prepaying property taxes. See link below

http://www.nytimes.com/2017/12/27/busin ... y-off.html

... when the FL resident cannot deduct his 2018 sales tax in 2017.. Most likely true. But say the FL guy buys a very expensive car, maybe $250k, late in December. He is a fussy guy, as he should be for that kind of money, and he refuses delivery of both vehicle and car (and does not pay) because he spotted some dust that the dealer can't get around to removing until January 2. But he knows to the penny the sales tax amount and walks in to the sales tax office and pays it and they accept it and they agree he won't have to pay it again on January 2 when he takes delivery. OK, I accept in advance how wacky that would be, so pass on that.

But it does raise this question. When someone buys a car from a dealer, at least in most if not all states, the buyer pays the sales tax to the dealer. The dealer may not remit some or all of the December collected sales taxes until January. Is that like the escrow issue? And it does not have to be a car. Even a small purchase from a corner store. (Yes, I am aware that sales tax deductions are estimated except for large purchases.)

Is that like the escrow issue?

In a way, but no, I’d say. An escrow account involves an escrow agent, who acts on behalf of the taxpayer, in terms of remitting insurance, taxes and the like. Transfers between the two are therefore non-events, tax-wise, because the acts of the agent get imputed to the principal. This also means that when the mortgage company (escrow agent) remits the property tax, it’s treated as if the principal remitted it directly, so the principal/taxpayer gets a deduction. The balance in the escrow account is the taxpayer’s asset. I don’t think I have an agency relationship with anyone at the local 7-11. Rather, the sales tax I pay on my banana Slurpee is held in trust by 7-11 for the state. It is immediately the state’s property and is no longer, “my funds.”

In the Galt case, Galt tried to argue that when transferred funds to some real estate firm he dealt with (which would later forward the taxes to the taxing authority) that the funds were transferred in trust, which constituted a payment of tax, and which would make the actual and eventual remittance to the taxing authority irrelevant. The court, quite rightly, didn’t see it that way.

Also, think of treatment of the real estate tax adjustment on the sale of property being reported on a settlement statement.

These aren't generally assessed yet at the time of sale.

I don’t think I have an agency relationship with anyone at the local 7-11. Right, I thought about that after posting. The store/dealer is the agent of the state, not of the customer.

As an irrelevant aside, here in the East, we have a chain of convenience stores that way outclass 7-11, at least in my opinion. Yes, we also have 7-11s, but in my unscientific observation, their parking lots are rarely busy, whereas Wawa's are almost always busy. So if you ever escape Ohio and come East, try a Wawa. Mitt Romney famously did, and he was impressed. The name comes from the town where they started (as a dairy) many years ago, and is the Native American term for wild goose, of which we have many. I once told that story to some flight attendants who looked at ma like I was nuts, but they did not call security. Wawa is a huge privately owned company.

The service stated, "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"

Does this require that the county assessor actually send a bill such that the taxpayer has something to apply against their payment? I would argue that the billing aspect is ministerial. I would assume, that for most counties, that by Dec 31 the valuations are done and the mill rate set (for counties on a calendar year). Anything left would be ministerial. Seems like others are suggesting that the bill date is when you're actually assessed. Am I misunderstanding something. See Example 2 in the IRS Alert, the assessment date is still the first of the fiscal year.

There is a definition of payment under 1.461-4(g)(1)(ii)(A). Payment doesn't include refundable deposit. The argument that without a bill all you have a is a deposit might be accurate. However I would say that the refundable aspect is what is relevant.

Lastly under IRC 461 for accrual basis taxpayers all you need is a reasonable estimate. I don't see the cash basis being held to a higher standard.

The taxpayers that seems to lose out then are really those that squarely fall under Example 2 of the IRS Alert.

I'm ignoring early case law and ruling since as discussed above they are distinguishable.

I'm ignoring early case law and ruling since as discussed above they are distinguishable.

Distinguishable from what?

Also, think of treatment of the real estate tax adjustment on the sale of property being reported on a settlement statement.

These aren't generally assessed yet at the time of sale.

Sure they are. The property tax adjustment on a settlement is generally for taxes assessed and paid by the seller, but are partially allocable from the closing date forward, and therefore partially allocable to the buyer.