IRS Warns Strategy Of Prepaying Property Taxes May Not Be Allowed

Homeowners in high-tax areas have been racing to prepay their 2018 property taxes in an effort to beat the new deduction limits that take effect next year. But the IRS warns in many cases that strategy may not be allowed.

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In some places with high local and state taxes, homeowners have been racing to pay next year's property taxes before January 1. That's when the new federal tax law takes effect, and it limits the amount of local taxes that property owners can deduct. Well, now the IRS is telling taxpayers trying to beat the deadline, not so fast. NPR's Scott Horsley explains.

SCOTT HORSLEY, BYLINE: In 2017, money you pay for state and local taxes is fully deductible on your federal return. But starting next year, that deduction will be capped at $10,000. People who owe more than that have an incentive to pay next year's tally now while they can still write it off, and that's triggered a lot of last-minute business for the local tax collector.

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UNIDENTIFIED WOMAN: We are currently experiencing high call volume. If you are calling about prepayment of your 2018 real property taxes, all information is provided on the finance website.

HORSLEY: Leaders in Montgomery County, Md., took a special vote this week authorizing prepayment of 2018 property taxes, and New Jersey Governor Chris Christie issued an executive order greenlighting prepayment statewide. Then the IRS hit the brakes. Attorney Lynn Ebel, who's with H&R Block's Tax Institute, says the IRS issued guidance yesterday saying prepayment will only be deductible this year if local authorities have assessed the property for 2018.

LYNN EBEL: If they're still not assessing the property until 2018, even if they are accepting payments, that cannot be deductible as real property taxes on the 2017 tax return even if they're paid in 2017.

HORSLEY: That IRS advisory caught many people off-guard, including Steve Rosenthal, a tax attorney who used to work for Congress's Joint Committee on Taxation.

STEVE ROSENTHAL: My wife yesterday morning took our check for 2018 property taxes and went to the mailbox and dropped it in the mailbox. And I fully expected that it would be deductible and was surprised last night by the IRS announcement.

HORSLEY: Rosenthal says while the tax law passed by Congress this month explicitly bars prepayment of local income taxes, lawmakers said nothing about prepaying property taxes. He suggests the IRS advisory may not be the last word.

ROSENTHAL: If you look around the country and the long lines of taxpayers who have been rushing to pay their property taxes in advance, I think there'd be plenty of motivated people to challenge the IRS.

HORSLEY: Congressman Leonard Lance is also weighing in. Lance represents a district in northern New Jersey where property taxes have only been assessed for the first half of 2018. He's urging the IRS to reconsider its guidance.

LEONARD LANCE: We want to make sure that residents in New Jersey are able to deduct property taxes to the greatest extent possible. I'm of the view that we shouldn't be paying in this country taxes on taxes.

HORSLEY: Lance was one of only a dozen House Republicans who voted against the tax law out of concern over the local tax deduction. He warns that if IRS doesn't backtrack voluntarily, he'll sponsor legislation to change it. Scott Horsley, NPR News, Washington.

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