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Prepaying real estate taxes for SEVERAL future years?
Old 01-23-2007, 01:07 AM   #1
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Prepaying real estate taxes for SEVERAL future years?

Granted, this may sound like a stupid idea, but just assume that it's worth it to the person paying the real estate taxes...

If someone itemizes their income tax return, and normally deducts their real estate taxes on Sch A, what is the IRS ruling on prepaying MULTIPLE future years (i.e. not just 2007/2008 taxes in Dec 2007, but also prepaying 2009 and possibly 2010 taxes as well)?

The only references I can find in Publication 17 (http://www.irs.gov/publications/p17/ch22.html) are as follows:

"The following two tests must be met for any tax to be deductible by you.
-The tax must be imposed on you.
-You must pay the tax during your tax year.

The tax must be imposed on you. Generally, you can deduct only taxes that are imposed on you."

Based on the above, I presume that the definition of "imposed on you" means that you have received a bill for the tax?

But, later on....

"Refund (or rebate). If you receive a refund or rebate in 2006 of real estate taxes you paid in 2006, you must reduce your deduction by the amount refunded to you. If you receive a refund or rebate in 2006 of real estate taxes you deducted in an earlier year, you generally must include the refund or rebate in income in the year you receive it. However, you only need to include the amount of the deduction that reduced your tax in the earlier year. For more information, see Recoveries in chapter 12."

From the above part on "refunds", it references if you receive a refund for taxes "deducted in an earlier year". Could this loosely refer to prepaying more than 1 year in advance, or is this referring to gov't bureaucracy taking 2-3 years to finally getting around to reappraising your house and reducing your real estate taxes that you paid several years ago?

I realize that it's a slim chance that you can deduct real estate taxes that you haven't been billed yet...but there are large income taxes involved for 2007, and a need for as many 'extra-ordinary' deductions as possible for 2007.

--Peter
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Re: Prepaying real estate taxes for SEVERAL future years?
Old 01-23-2007, 05:59 AM   #2
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Re: Prepaying real estate taxes for SEVERAL future years?

I do the multiple year thing now that I pay enough property taxes that allow me to itemize every other year. I doubt what you propose will work for one reason which is that it may not be possible to get the taxing jurisdiction to give you a number beyond the current approved rates. However, a request for letter ruling sent to the IRS would answer the question specifically.
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Re: Prepaying real estate taxes for SEVERAL future years?
Old 01-23-2007, 06:03 AM   #3
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Re: Prepaying real estate taxes for SEVERAL future years?

I think you could get away with pre-paying next years tax bill w/out much of a problem - several years may be risky.....the other thing you can do (also grey area) is to over-pay your state income tax, within reason(easy to do if you own your own company but probably ways to over-withhold if you are an employee), since state taxes are deductible - then get a refund next year as quickly as possible or apply it to the next years bill.
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Re: Prepaying real estate taxes for SEVERAL future years?
Old 01-23-2007, 06:45 AM   #4
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Re: Prepaying real estate taxes for SEVERAL future years?

OldMcdonald: Over paying state tax will not work too well as any refund of state taxes for a year you itemize (refund received the following year) must be shown as income that year (see line 10 of IRS form 1040).
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Re: Prepaying real estate taxes for SEVERAL future years?
Old 01-23-2007, 06:49 AM   #5
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Re: Prepaying real estate taxes for SEVERAL future years?

Quote:
The tax must be imposed on you. Generally, you can deduct only taxes that are imposed on you."

Based on the above, I presume that the definition of "imposed on you" means that you have received a bill for the tax?
hmm...I prepay my estimated state income tax as well and dont rec. a bill....you could overpay those theoretically (esp. if you think the next year will bring a lot of overtime) or just want to lower yourself into another tax bracket....what happens if you dont end up owing that much state tax is they send you a refund when you fill out your taxes...and that refund is then taxable income for that year...in other words, you are just moving income from one tax year to another....

edit. Old Army Guy responded while I was typing
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Re: Prepaying real estate taxes for SEVERAL future years?
Old 01-23-2007, 07:29 AM   #6
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Re: Prepaying real estate taxes for SEVERAL future years?

My take... and only an opinion....

Property taxes are different... you can do the double up on payments because you pay (lets say) 2006 taxes in January 2007... you pay 2007 taxes in December 2007.. so you paid WHAT WAS DUE in 2007 for two years...

Now, if you paid 2008 taxes in Dec 2007... well, THEY ARE NOT DUE UNTIL LATE 2008... so I would say they are not deductable... and if you paid 2009 in late 2007... well, they will send you back a check (at least all the ones I deal with in Texas will)... they don't want any overpayments...

I would say that overpaying your income tax by a lot might be OK, but I remember something in the code that said you could not do anything (and I know I am butchering this....) that only has a tax avoidance as its purpose.. so, lets say you only 'owe' $10k, but pay $50k.... would they disallow the $50K deduction in the current year even though you would have to recognize the $40k as income next year I don't know, but I think you might have a problem if you get audited.. and since your percentages are now going to be out of whack... I bet your score is a lot higher and you would cause an audit...
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Re: Prepaying real estate taxes for SEVERAL future years?
Old 01-23-2007, 07:41 AM   #7
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Re: Prepaying real estate taxes for SEVERAL future years?

Quote:
Originally Posted by Old Army Guy
OldMcdonald: Over paying state tax will not work too well as any refund of state taxes for a year you itemize (refund received the following year) must be shown as income that year (see line 10 of IRS form 1040).
The purpose of over-paying the state tax in one year is to shift the fed taxes to the next year, when presumably the OP would have less income to be taxed; if your income fluctates wildy from year to year it can be advantageous w/in reason. Obviously if you are in the same bracket from one year to the next it doesn't do much for you, but the OP stated he was particular concerned with maximizing deductions for 2007.
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Re: Prepaying real estate taxes for SEVERAL future years?
Old 01-23-2007, 08:14 AM   #8
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Re: Prepaying real estate taxes for SEVERAL future years?

Advance payments for unbilled expenses are not deductible.
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Re: Prepaying real estate taxes for SEVERAL future years?
Old 01-23-2007, 12:02 PM   #9
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Re: Prepaying real estate taxes for SEVERAL future years?

Quote:
Originally Posted by MooreBonds
I realize that it's a slim chance that you can deduct real estate taxes that you haven't been billed yet...but there are large income taxes involved for 2007, and a need for as many 'extra-ordinary' deductions as possible for 2007.
Ye gods, man, how high a bracket will you be in to indulge in these accounting gymnastics?

There has to be an opportunity cost. I guess you'd have to balance the tax savings of paying $10K in advance versus the lost income/cap gains from putting $10K into a long-term CD or a small-cap value stock.

If you had to sell the house before the property-tax payments caught up with you, that would have to be itemized in the title company's transaction or otherwise paid back to you by the buyer. But if you sold the house then there'd be the sticky issue of losing a deduction that you'd already taken.

Quote:
Originally Posted by retire@40
Advance payments for unbilled expenses are not deductible.
And once again you're noodging your opinion disguised as a fact without a reference. But I think you sure look smart doing it... to a few of the posters, anyway. Of course that's just my opinion too.
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Re: Prepaying real estate taxes for SEVERAL future years?
Old 01-23-2007, 12:18 PM   #10
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Re: Prepaying real estate taxes for SEVERAL future years?

Also, these types of "gymnastics" could potentially trigger the AMT, and then you would lose the tax benefit of all the prepayments.
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Re: Prepaying real estate taxes for SEVERAL future years?
Old 01-23-2007, 01:59 PM   #11
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Re: Prepaying real estate taxes for SEVERAL future years?

Quote:
Originally Posted by Nords
...And once again you're noodging your opinion disguised as a fact without a reference. But I think you sure look smart doing it... to a few of the posters, anyway. Of course that's just my opinion too.
Don't know what your problem is.

I stated my opinion like everyone else based on what I believe the right answer is.

You don't like it, don't read it.
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Re: Prepaying real estate taxes for SEVERAL future years?
Old 01-23-2007, 02:27 PM   #12
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Re: Prepaying real estate taxes for SEVERAL future years?

I am in basic agreement with retire@40.

I know the IRS has taken a fairly conservative position on when businesses can deduct expenses, for example if a business prepays rent, insurance, etc, it can only deduct in the year the rent was due or the insurance payment was due. Publication 535 discusses business expense deductions. There may be some wiggle room, IIRC, if there is a business reason for a prepayment.

I would assume, but I have no reference, that the same principles would apply to individual returns. However, it seems common for people to at least pay two years of real estate taxes in one year so they can manage their deduction strategy. I know we would get our property tax bill at the very end of December and would immediately pay it, even though it did not have to be paid until the next year. It seems like most of the tax people think this is OK. After all, the amount is set and it was billed. I think you would have a much harder time prepaying mortgage interest by more than a month.
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Re: Prepaying real estate taxes for SEVERAL future years?
Old 01-23-2007, 02:52 PM   #13
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Re: Prepaying real estate taxes for SEVERAL future years?

Quote:
Originally Posted by Martha
...I know we would get our property tax bill at the very end of December and would immediately pay it, even though it did not have to be paid until the next year. It seems like most of the tax people think this is OK. After all, the amount is set and it was billed...
If you receive a bill, then the deduction is allowed in the year paid even if the bill is for the following year.

You cannot deduct an arbitrary unbilled amount in advance.

So what you did is perfectly fine and is commonplace.

In a similar situation (medical expenses instead of property taxes) going back to 1956 (Robert S. Bassett, 26 T.C. 619), the IRS dissallowed prepaid medical expenses that were paid in advance and the tax court agreed. This case is still used today as a practical answer to these "advance payment" questions.
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Re: Prepaying real estate taxes for SEVERAL future years?
Old 01-24-2007, 12:47 AM   #14
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Re: Prepaying real estate taxes for SEVERAL future years?

Thank you all for the replies.

It sounds like if you haven't actually received the bill from the local tax assessor's office, then you'd be swimming with the sharks if you try going past 2008's property tax. Perhaps if we talked to the assessor's office to see if we could work out a discount for prepaying multiple years in advance if they send us an official bill and simply credit it to our account?

The deal is, 2007 (and 2006, but it's already said and done) will be much larger income-wise than 2008.
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Re: Prepaying real estate taxes for SEVERAL future years?
Old 01-24-2007, 02:32 PM   #15
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Re: Prepaying real estate taxes for SEVERAL future years?

Quote:
Originally Posted by Old Army Guy
OldMcdonald: Over paying state tax will not work too well as any refund of state taxes for a year you itemize (refund received the following year) must be shown as income that year (see line 10 of IRS form 1040).
The original question is a specific tactic in the general strategy of "bunching
deductions". The idea is to maximize one's deductions, as viewed over the course
of multiple years, by maximizing them on alternate years. Then on the intervening
alternate years, deductions are minimized and one uses the standard deduction
instead. Thus one "gets something for nothing" deduction-wise, because presumably
one's deductions in these minimum years are well below the standard deduction.

So in the case of state income tax, one doesn't ask for a refund of the overpaid taxes
from the previous year, instead applying them to this year's state income tax. So you
effectively pay state income taxes for two years, every other year, and none in the
intervening years.

Other ways I can imagine to do this would be:

(1) Pay property taxes a month late (if your's is due in December, like mine).
Thus you pay none on "minimum" years and two-year's worth in maximum years.
Potential drawback may be substantial penalties on the late payment.

(2) If (like me) you make your charitable donations in December (it's the giving
season, after all), just pay them a little late (in January) every second year.
Charitable trusts may be a better way to accomplish the same thing, though.

(3) Do the same thin with yearly medical events (e.g. get dental exam, or
routine physical, in January and Decmeber of of one year, not at all the next year).
But, since you can take your choice (according to Turbotax) of deducting medical
expenses either when you incurred them or when you paid for them, you can simply
pay for your late-year procedures on-time one year and late the next year (sorry, Rich).

These are all that spring to mind right now. Anybody got others ?

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Re: Prepaying real estate taxes for SEVERAL future years?
Old 01-25-2007, 06:13 AM   #16
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Re: Prepaying real estate taxes for SEVERAL future years?

My response was related ONLY to the State Income Tax Question. If you take the refund check or apply the overpayment to next year the facts do not change. The refunded or in your example the overpayment applied amount is still income in the following year (line 10 Form 1040). I think you can nit pick this thing and do foolish things to the point of ensuring at least a letter FROM the IRS, which, IMHO is not the real goal. Getting an additional $2,000 DEDUCTION when you are at a 25% tax rate is only going to save you $500 in THIS YEARS taxes -- What is it going COST you for the moved forward deductions NEXT YEAR -- If then you are in the 15% bracket you will "lose" $300 in Taxes. So all of this jumping around is going to net you $200 -- and may or may not cause you lots of administrative problems. But to each his own!
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Re: Prepaying real estate taxes for SEVERAL future years?
Old 01-25-2007, 06:40 PM   #17
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Re: Prepaying real estate taxes for SEVERAL future years?

Quote:
Originally Posted by Old Army Guy
Getting an additional $2,000 DEDUCTION when you are at a 25% tax rate is only going to save you $500 in THIS YEARS taxes -- What is it going COST you for the moved forward deductions NEXT YEAR -- If then you are in the 15% bracket you will "lose" $300 in Taxes. So all of this jumping around is going to net you $200
OAG, I think you are missing the point, which is that NEXT YEAR one's deductions
might total less than the standard deduction (even with the extra $2000 in "moved"
deductions), meaning you lose NOTHING next year, for a net gain of $500.

(Or maybe I'm missing the point, and the scenario you describe is what the OP was
talking about. But my point does have general applicability, to my situation and
that of many other ER's I'd imagine).

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