SALT Update: Property Tax Prepayments Need an Assessment

The tax world has been ablaze the last several weeks with discussion of ways to mitigate the Tax Cuts and Jobs Act’s limitation of the state and local taxes paid deduction. The bill previously stated that individuals couldn’t prepay state and local income taxes, but it made no mention of property taxes, raising the question: Could someone prepay their 2018 property taxes in 2017?

In newly-issued guidance today, the IRS determined that prepayments must be both assessed and paid to be deductible in 2017. 

Individuals across the country flocked to their local tax offices to pay their property taxes over the last several days.  New York Governor Andrew Cuomo issued an executive order mandating local governments to allow the prepayment. Montgomery County, Maryland met in a special session yesterday to allow prepayments, and in Fairfax County, Viriginia, someone reportedly prepaid property taxes for several years, in spite of the lack of clarity of whether this would be deductible. (And it’s important to highlight that individuals subject to the alternative minimum tax would have any SALT deduction benefit eliminated in its entirety.) 

The IRS guidance issued today means that many individuals who prepaid might not benefit. According to the guidance, an individual’s property tax liability must be paid in 2017 to be deductible, but it must also be assessed. Estimating your property tax liability isn’t enough. The property tax must be billed too. 

Already, tax attorneys are on Twitter arguing over what a property tax assessment must contain and whether localities could issue them in the few remaining days of the tax year, so we haven’t heard the last on this issue. 

But for many who already prepaid, the benefit of their action is simply providing an interest-free loan to their municipality.