To Prepay or Not to Prepay Co-op Property Taxes?

The GOP’s hastily passed new tax law has accountants and tax lawyers scrambling to advise clients on the right moves to make before 2017 expires and the new law goes into effect on January 1. Since the new law has placed a total $10,000 limit on deductions for state and local income taxes as well as property taxes, many New York City co-op and residents are asking: should I prepay my 2017-18 property taxes before the end of the year to avoid the looming cap on deductions? 

The answer hinges on the fact that all co-op corporations pay their property taxes – and then pass the deduction on to shareholders – on the “accrual” basis, meaning the expense is based on when it occurs. The “cash” basis, on the other hand, means the expense is based on when it is paid. To benefit from a pre-January 1 tax payment, the corporation would need to switch from the accrual to the cash accounting method, which requires approval from the Internal Revenue Service, usually a three- to six-month process. 

“If you pay your property taxes without applying to the IRS for a change in accounting methods, it’s considered a ‘pre-payment,’” says Jay Menachem, a CPA. “Normally there has to be a business reason for the request for a change, and it can’t be purely tax-motivated. If the IRS rejects the request, all shareholders will have to amend their tax returns. That’s a big sticking point.” 

To further complicate matters, the IRS issued an advisory on Wednesday, saying that to qualify for the deduction, property taxes not only need to be paid in 2017, they must also be assessed in 2017.  Therefore, homeowners who prepaid their taxes based on estimated assessments, or who tried to pay several years’ worth of taxes at once, will probably be out of luck. 

Happy New Year from your friends at the GOP!