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The Hot Debate: Can You Deduct Prepaid Property Taxes?

With just two weeks to go before the April 17 deadline, prominent tax advisers still don’t agree on whether all those people who prepaid 2018 property taxes can deduct them in full.

The debate on such deductions arose after Congress passed the largest tax overhaul in three decades late last year. In a landmark change, lawmakers capped write-offs for state and local taxes at $10,000 per return for both single filers and married couples. The provision takes effect for 2018 and will lower these write-offs for millions of Americans.

The overhaul barred deductions for many prepayments of 2018 state and local income taxes, but it was silent on deductions of prepaid property taxes. After Christmas, long lines of people rushing to prepay their 2018 property taxes before year-end gathered at local government office.

Then on Dec. 27, the Internal Revenue Service warned that not all prepayments of 2018 property taxes would be deductible on 2017 returns. The agency said that to qualify for a write-off, the tax liability actually had to have been known at the time.

Right away, some tax specialists strongly agreed with the IRS but others strongly disagreed. The IRS and its supporters argued that those who prepaid all their 2018 property taxes can only deduct the portion that was known or determined at the time. In many cases, that means only for a few months of the year or not at all.

The IRS’s opponents argued for higher deductions of reasonable estimates. They based this argument on prior tax rulings and regulations that they think apply to this issue.

Now, three months later, little progress has been made.

Leading the opposition against the IRS’s position is Lawrence Axelrod, an attorney at Ivins, Phillips & Barker.

“The IRS position is misguided because it doesn’t take into account Treasury’s own regulations,” he said.

These regulations allow taxpayers to deduct amounts paid that will be due within 12 months. The IRS and its supporters disagree. They cite court decisions which say that to be deductible, taxes must have been imposed and the amount must be known.

Stephen Baxley, who heads tax planning for Bessemer Trust, a prominent multifamily office, agrees with Mr. Axelrod.

“If the amount is a reasonable estimate made in good faith, it’s deductible,” he says. The firm is responsible for preparing nearly 1,000 individual returns.

Other tax preparers agree with the IRS.

Brian Lovett, a certified public accountant with WithumSmith+Brown in New Jersey, where property taxes tend to be high, says his firm is following the IRS’s guidance: “We think the amount due must be determined for a prepayment to be deductible.”

The correct answer matters.

More than 80% of property-tax revenue is collected by local governments with a fiscal year other than Dec. 31, according to the latest data compiled by the Lincoln Institute of Land Policy. Frequently, the fiscal year ends on June 30.

As a result, total property tax bills for 2018 weren’t determined by year-end in many areas of the country. Many could reasonably be estimated, however.

For example, say John lives in a county with a fiscal year ending June 30. By the end of 2017, he knew he would owe $6,500 in property tax due by June 30, 2018. He could likely assume that his bill for the second half of 2018 would be about the same. So in late December, he prepaid $13,000 for 2018 to his county.

According to the IRS’s position, John can only deduct a prepayment of $6,500—because the amount due for the second half of the year hadn’t been set.

But if Jane lives elsewhere and knew she would actually owe $13,000 in property tax for 2018, she can deduct a prepayment of that amount on her 2017 return.

Some advisers allow both approaches. David Lifson, a CPA with Crowe Horwath who has many high-earning clients, says he recommends that clients deduct prepayments of known amounts. But he will allow a deduction of an estimate, “if I feel the client understands the risk that the IRS will disagree.”

The debate is ongoing. In March, Democrats on the Ways & Means Committee wrote acting IRS Commissioner David Kautter to protest the IRS’s interpretation of the law.

The good news for taxpayers who want to deduct prepayments of estimates is that neither Mr. Lifson nor Mr. Baxley thinks these write-offs need to be disclosed on IRS Form 8275. On it, taxpayers are supposed to disclose risky positions to avoid certain penalties. Supporters of the IRS’s position think the form should be filed, however.

Some taxpayers are also pushing preparers to take the deduction because the audit risk is low, given constraints on IRS resources.

Emily Matthews, a CPA with Edelstein & Co. in Boston, says she explains the IRS’s position to clients. But she says, “I think we’ll see a lot of people who prepaid estimated taxes opt to deduct them.”

By  | Apr 4, 2018

Posted by Sigrid Cottrell
Sigrid's Butte Blog

Commercial resurgence? Gunnison real estate market springs to life in
June 8, 2013

Commercial resurgence? 
Gunnison real estate market springs to life in recent months
Times Editor
Originally published 2013-05-30

Over the last six months, a glut of commercial properties on the market in the City of Gunnison has been whittled away by a growing number of ventures new to town.

So far this year, a total of three noteworthy, non-lodging commercial or industrial properties have sold, accounting for nearly $1.2 million in sales within the city, according to Multiple Listing Service (MLS) data. And those only include parcels that were listed at the time of sale.

By way of comparison, four commercial properties (totaling $670,000) changed hands in Gunnison in all of 2012 — a year during which commercial sales activity was significantly higher than the three years prior.

Yet, common among many of the commercial sales in recent months is an influx of dollars from outside the community. Large national chains such as Tractor Supply Co. and Family Dollar have staked claims along Gunnison’s busiest thoroughfares. And a few smaller businesses born in Crested Butte have expanded southward, scooping up properties that in some cases had remained on the market for years.

Longtime Gunnison Valley realtors report being encouraged by the recent activity — including that it may be a signal of bigger things to come. One need only look to the concrete walls going vertical in Van Tuyl Village or demolition taking place at the former John Roberts Motorworks building as the most poignant examples of Gunnison’s recent resurgence in the commercial real estate market.

“The fact is, they made a commitment to come in here,” said Dan McElroy, owner of Coldwell Banker-Bighorn Realty. “There seems to be a real key element in somebody’s ability to foresee or think that the future’s going to be pretty bright for Gunnison.”

On the other hand, Erich Ferchau, owner of Re/Max in Gunnison, offered a much more measured perspective on the recent activity.

“It’s Gunnison. It doesn’t take but a few things selling and we’re hopping,” he said.


Companies investing 
in Gunnison 

Whether through the purchase of property for expanding an existing, up-valley business or large national chain stores’ decisions to open branches locally, some recent sales point to an influx of money from outside city limits.

Drake Real Estate of Denver quickly pushed a commercial subdivision at Van Tuyl Village through the city’s planning pipeline late last year. The anchor within that development is a Tractor Supply Co. (TSC) store currently under construction.

The site was selected by Miller Frishman Group of Denver, who works on behalf of a numerous national tenants.

So, why Gunnison?

David Spriggs of Miller Frishman couldn’t disclose TSC’s specific criteria, but he did say that he sees the city providing “overall a very stable economy within Colorado.”

“The thing I like about Gunnison that makes it a unique community within that region, obviously you’ve got the college, which is a very captive audience from a retail standpoint,” he continued. “You also have a really high number of tourist visits on an annual basis to Gunnison and the surrounding area.”

And Spriggs said that as the Front Range’s population continues to grow, he expects those tourist visits to climb in step.

He noted that TSC is only the anchor tenant at the commercial development on the north side of Gunnison, and Drake is in the process of soliciting other businesses for Van Tuyl Village.

Meanwhile, demolition of the former John Roberts building at 231 W. Tomichi Ave. is underway in preparation for a Family Dollar store. Gunnison’s Community Development Director Steve Westbay said the company has presented site plans and is in the early stages of zoning and building permit review.

A couple businesses born in Crested Butte also have acquired commercial property in Gunnison in recent months. The Sherpa family in March purchased the former Tic Toc Diner building at 323 E. Tomichi Ave., where a second branch of Sherpa Café opened.

Michael Knoll, owner of The Eldo in Crested Butte, bought The Last Chance at 620 S. Ninth St. last November, which has also resulted in a down-valley expansion of Mikey’s Pizza within the establishment.

Knoll said that he was captivated by the prospect of bringing the caliber of music booked by the Eldo to The Last Chance. But he also saw a potential for a broader-based clientele — including college students, middle-aged residents interested in good music and much of The Last Chance’s previous, country-steeped customers — at the longtime Gunnison watering hole.

“The dynamic to reach all those groups of people was more enticing than what I have up here in Crested Butte,” Knoll said, “and the fact that Gunnison doesn’t really have anything like that.”

“I think what you have to realize is we’ve gotten to a point where there’s probably some opportunities for people to make some moves,” observed Re/Max’s Ferchau. “People who have more stability financially, they can make that move with a little more confidence. ... I’m encouraged, not because of the few little things that have happened, but because I think there’s more of an acceptance that we as a community need a little bit more going on.”


Commercial activity a signal of bigger things to come?

Despite recent commercial sales, there’s still more people selling than buying, noted real estate broker Bill Nesbitt, owner of Nesbitt & Company.

Through last week, 38 commercial or industrial properties in Gunnison were listed on the MLS. Numerous properties on Main Street — including all three spaces currently occupied by high-end furniture retailer Interiors with Oohs and Aahs — are on the market.

And since the beginning of last year, 68 other listings either expired or were withdrawn from the market.

“I think better times are coming,” said Nesbitt. “There seems to be a belief with people bringing in outside money that they can make money.”

The question on his mind is whether the recent activity in the commercial sector will impact the larger real estate market — including residential sales.

Bighorn’s McElroy tends to think so — especially as compared to the Crested Butte area, where there’s little question that residential activity tends to drive the overall market.

“In Gunnison, because it’s really a main service area, it really stands on its own,” he said. “When somebody comes into Gunnison and puts their money down on a commercial place, you gotta believe that there’s more to it than being drawn along with the residential real estate market.”

Alpengardener owner Krista Hildebrandt hopes that distinction as a service center will help entice customers to patron a new garden center she’s opening in Gunnison. While the business is leasing the property on the south side of the city, Hildebrandt’s aim is to serve a clientele that she has found difficult drawing to the business’ main Crested Butte South location.

“Here I am offering a full-service garden center 20 miles north and nobody will come there,” she said. “My idea of expanding in Gunnison was to get more of the Gunnison market.”  
Posted by Sigrid A. Cottrell


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