Property taxes – Should I pay in December or January?

This question pops up every December: should I pay my property tax bill in December or January? Well, the answer is not that easy. Let’s tackle it one step at a time.

1. Do I really have a choice?

Usually, yes. For most counties and school districts, the deadline is January 31st. If you pay your taxes yourself, by check or credit card – you can pay right away or wait until the last day of January. The amount will be the same either way.

If you use mortgage escrow for taxes, your mortgage company will pay your bill for you. As a rule, they will pay in December. However, you may be able to contact them and request that they wait until January. One recent trend that I find troubling is that more and more mortgage companies started paying property taxes late, sometimes even past the January deadline which causes penalties on the owner. I’m guessing this reflects the lender’s cash flow troubles, and you still need to be on top of it.

Some escrow companies go an extra step and ask you when to pay – but do not count on that. If it matters to you – then you need to make sure it happens. Which brings us to the next question…

2. Does it matter when it is paid?

Yes, it does. Even though the amount of your property tax will be the same, the amount of your IRS tax may be different. This is because the IRS looks at the date of actual payment, no matter which year this bill covers.

Let’s make sure that we are absolutely clear on this last sentence. Your current property tax bills cover the year of 2017. Your county, school district or utility district will apply it to 2017 – whether you pay in December 2017 or January 2018. Not so with the IRS. If you pay it in December 2017, the IRS will count it in 2017. If you pay it in January 2018, it will belong on your 2018 IRS tax return, not on 2017 return – even though the bill itself is for 2017!

Because of this tricky IRS rule, the decision on when to pay property taxes has to do with your income tax situation.

Before we address income tax, I need to mention “timing” rules that you may or may not be aware of. When exactly is the date when the tax is considered paid?

• If you pay by mail – it is the date when your check is mailed. To be on the safe side, get a proof of mailing from the post office.
• If you pay online – it is the date when you entered your credit card information online. Print and save your online confirmation as a proof.
• If you use escrow account – it is the date when the escrow company actually transferred your money to the tax collector. It does not matter that you were paying into your escrow account every month. What matters is when the money was paid out of your account.

3. Complication: properties purchased or sold last year.

If you did not own the property for the entire 2017 – you can only count taxes for “your” part of the year. This rule applies to both your personal house and your investment properties.

To find the numbers needed for this calculation, check the front page of your closing statement – either HUD-1 or Closing Disclosure statement, the bottom section. If you cannot find the numbers, simply pro-rate your annual 2017 tax bill, based on how many days you owned the property.

4. Can I deduct property taxes for my own house?

Maybe. The answer depends on whether or not you can itemize your personal (non-business) deductions. To get a very rough idea, take the amount of mortgage interest paid on your residence and add the amount of charitable donations you made in 2017. By the way, download and read IRS Publication 526 if you are not sure what qualifies as a charitable donation – you may be UNpleasantly surprised.

If that figure is more than (or at least close to) $6,300 for singles or $12,600 for couples – you definitely can itemize, and paying taxes in December will boost your deductions. If your rough figure (mortgage interest + donations) is significantly less than the $6,300/$12,600 threshold – paying your taxes in December may or may not help you. It will now depend on a lot of other factors, and you may need to play with tax software or ask a tax specialist.

If you are below, but close to, the itemized deductions threshold, there is a popular strategy known as bunching: you pay two years worth of taxes every other year. In January, you will pay for the prior year and then in December – for the current year. The next year, you pay nothing, and so on. Before deciding on this strategy, run your numbers for both years or consult an expert.

Warning for 2018: Trump’s tax reform includes fundamental changes to itemized deductions and doubling the standard deduction. Deferring deduction into 2018 may backfire on you. If in doubt – pay now!

5. Can I deduct property taxes for my rental properties?

Can you deduct? In most cases, yes. Unlike with your residence and personal deductions, taxes paid on rental properties almost always count as a business deduction. However – can I deduct? – may not be the right question. A better one would be: should I deduct? – as in will I benefit from this deduction?

Perhaps. It really depends on your overall tax situation. Below, we will look at some examples and see that the right answer really does depend. So, what is my advice? Same as usual: buy tax software and play “what-if.” And yes, you may want to ask for professional help if these calculations are not your cup of tea.

One important warning about investment properties. If you purchased a new rental property in 2017, and it is still being rehabbed – you will want to delay paying property taxes until January. Taxes paid in December are small and not deductible anyway.

6. Can I deduct property taxes for my flip properties?

If the property is still yours – my answer is: No. The standard treatment of flip properties is to deduct all expenses from the sale price in the year it is sold. “All expenses” includes property taxes.

In some cases, you may be able to deduct these taxes ahead of time, but I would not risk making this decision without consulting an expert.

7. When too much is too much?

If the tax law made any sense (notice: I said – IF), then more deductions would always result in less taxes. Not in real life.

• Example A. Mary the Realtor. Mary is single, and she earned $40,000 in commissions. Half of that was offset by business deductions, so Mary reports only $20,000 business income. Mary owns 3 single-family rentals that show combined tax loss of $10,000 – before she pays her 2017 property taxes. Although Mary owes the IRS $3,000 in self-employment taxes, her income tax is zero. Pre-paying her property taxes in December makes no sense: she will still owe the IRS the same $3,000, because rental losses do not reduce self-employment tax, and her income tax was already zero.

• Example B. Jian and Vivian, family of engineers. Between the two of them, they make $160,000 in salaries from full-time jobs. They own a small apartment complex, but they cannot take any tax losses from this property. Why? Because their income is too high, according to the IRS passive activity losses rules. Even if Jian and Vivian pay property taxes for the apartment complex in December, their 2017 IRS taxes will not change one cent. If one of them was a full-time investor, they could possibly qualify for the Real estate professional exception, but as engineers, they are out of IRS luck.

• Example C. Rodrigo the wholesaler. Rodrigo runs a very successful business, wholesaling commercial properties. In 2017, he made almost $300,000 net profit (yes, it is possible!) One ouch from his success is his nearly $100,000 IRS bill. Naturally, Rodrigo is looking for any opportunity to pay less, and he wants to pre-pay $10,000 in property taxes for his own house in December. Bad news for Rodrigo: his IRS bill will not go down because of a nasty extra tax known as AMT – Alternative Minimum Tax. Which proves that the rich people are not without problems either.

8. Tough choice: bother or ignore?

Throughout this article, I kept suggesting that you buy tax software or hire a tax expert. Isn’t there a simpler and cheaper solution?

Simpler – sure: just pay your tax bill whenever and avoid the entire decision process. But it is hardly a cheaper alternative. By paying your property taxes in the wrong month, you may lose a valuable tax deduction – possibly worth $1,000 or even more of actual cash in your pocket.

Only you can decide: is it worth the trouble for you?