Californians, pay your real estate taxes before 2018?

As part of the recent tax reform bills circulating through congress, real estate taxes are under fire as one deduction home owners often take that may no longer be on the table in 2018.


One suggestion in the new tax bills set before congress is to cap any deduction on real estate taxes at $10,000.  For folks in high tax or high priced areas  (such as California) this could result in a large deduction disappearing in 2018.  While tax reform hasn’t been finalized, it reasons that Californians that have the opportunity to pay 2018 real estate taxes while we’re still in the 2017 calendar year can prevent potential financial harm from reform that isn’t passed until 2018.


Californians, for example, can pay taxes in equal installments 6 months apart.  So for most people, they’ll pay one installment in November and another prior to April of the following year.  BUT, the option is on the table for home owners to pay the full year worth of taxes in one payment.


Let’s look at an example, assuming the final tax reform bill that is passed eliminates deductions beyond $10,000:


On a $3 million dollar home, taxes may be $30,000/year or more.  Assuming the equal installments are due in November 2017 and April 2018 in payments of $15,000 each, with another payment due for $15,000 in November 2018, under current tax law, each 2018 installment payment would be deductible, allowing the home owner the option of deducting the full $30,000 for the year.


Under proposed reform, the 2017 installment payment could still be deductible, but with the 2018 installments totaling $30,000, if the reform bill passes as proposed, a home owner may lose out on $20,000 worth of deductions.


In our scenario, we suggest that if possible, a home owner pay both November and April’s installments in one lump sum prior to the end of 2017.  The $30,000 installment would cover the home owner until the November 2018 installment, and when that payment comes, $10,000 of that $15,000 installment would still be deductible, equaling a deduction loss of only $5,000 as opposed to the $20,000 in the previous example.


No one is sure what the final tax reform will look like as congress still has a seemingly long way to go (and surely more pork to stuff into the proposed bills), but for those with the funds and ability to do so, it may be a good idea to protect yourself against tax reform that could prove harmful in 2018.


**For all of your tax planning, we recommend consulting a CPA or tax expert.

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