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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

850,000 Properties Bounce Back to Positive Equity!
June 16, 2013

Residential property analytic provider

CoreLogic® recently released new analysis

showing the market is making big moves, with

850,000 additional residential properties turning

to positive equity during the first quarter of 2013.

In addition, the analysis shows good news for

mortgages: the total number of mortgaged

residential properties standing in negative equity

is down by nearly 1 million from the previous

quarter, moving from 10.5 million (21.7 percent)

at the end of the fourth quarter of 2012, to 9.7

million (19.8 percent) in the first quarter of 2013.

The national aggregate value of negative equity decreased more than $50 billion to $580

billion at the end of the first quarter from $631 billion at the end of the fourth quarter of 2012.

This decrease was driven in large part by an improvement in home prices.

“We are seeing an increase in homeowner equity as home prices continue to rise,” said Rei

Mesa, President & CEO of Prudential Florida Realty in January’s issue of RISMedia’s Real

Estate magazine. “This translates to a larger number of homeowners who are no longer

underwater and can move up, or make a lateral move or downsize because they are now in a

position to sell their home. With this lift in homeowner equity, we should experience a rise in

traditional home sales.” Of the 39 million residential properties with positive equity, 11.2 million have less than 20

percent equity. At the end of the first quarter of 2013, 2.1 million residential properties had

less than 5 percent equity, referred to as near-negative equity. Under-equitied mortgages

accounted for 23 percent of all residential properties with a mortgage nationwide in the first

quarter of 2013. The average amount of equity for all properties with a mortgage is 32.8

percent.

“The impressive home price gains of 2012 and the beginning of 2013 have had a big impact

on the distribution of residential home equity,” says Dr. Mark Fleming, chief economist for

CoreLogic. “During the past year, 1.7 million borrowers have regained positive equity. We

expect the pent-up supply that falling negative equity releases will moderate price gains in

many of the fast-appreciating markets this spring.”

“The negative equity burden continues to recede across the country thanks largely to rising

home prices,” says Anand Nallathambi, president and CEO of CoreLogic. “We are still far

below peak home price levels, but tight supplies in many areas coupled with continued

demand for single family homes should help us close the gap.” Highlights as of Q1 2013:

Nevada had the highest percentage of mortgaged properties in negative equity at 45.4 percent,

followed by Florida (38.1 percent), Michigan (32 percent), Arizona (31.3 percent) and Georgia (30.5

percent). These top five states combined account for 32.8 percent of negative equity in the U.S.

Of the largest 25 metropolitan areas, Tampa-St. Petersburg-Clearwater, Fla. had the highest

percentage of mortgaged properties in negative equity at 44.1 percent, followed by Miami-Miami

Beach-Kendall, Fla. (40.7 percent), Atlanta-Sandy Springs-Marietta, Ga. (34.5 percent), Chicago-

Joliet-Naperville, Ill. (34.2 percent) and Warren-Troy-Farmington Hills, Mich. (33.6 percent).

Of the total $580 billion in negative equity, first liens without home equity loans accounted for onehalf,

or $290 billion aggregate negative equity, while first liens with home equity loans accounted for

the remaining half at $290 billion.

6.0 million upside-down borrowers hold first liens without home equity loans. The average mortgage

balance for this group of borrowers is $211,000. The average underwater amount is $48,000.

3.7 million upside-down borrowers hold both first and second liens. The average mortgage balance

for this group of borrowers is $294,000.The average underwater amount is $79,000.

The bulk of home equity for mortgaged properties is concentrated at the high end of the housing

market. For example, 88 percent of homes valued at greater than $200,000 have equity compared

with 73 percent of homes valued at less than $200,000. “As leaders and agents, it is up to us to get the word out,” said Gary Scott, President of Long

& Foster Real Estate, during RISMedia’s recent Power Broker Forum at NAR Midyear. “There

is a huge opportunity for people who had negative equity to come back into the market. We

have to help those sellers. It’s about a grass roots effort—about taking your sphere of

influence and walking them through the reality of the market.”

Posted by Sigrid Cottrell

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