Author Topic: Pre-paying property taxes - huge risk-free rate of return?  (Read 2637 times)

DallasFI

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Pre-paying property taxes - huge risk-free rate of return?
« on: November 25, 2017, 12:03:54 PM »
My situation is I have essentially zero deductions each year except my property taxes, which are roughly equal to the standard deduction for single individuals - $6,300. So based on that, I wouldn't itemize.

But I've read you can deduct property taxes in the year you pay them, not the year they are due (http://smallbusiness.chron.com/tax-advantages-paying-property-taxes-year-early-21437.html for reference), so I could pay 2 or 3 years of property taxes this year and be above the itemization threshold. My marginal tax rate is 33%, so by paying an additional $6,300 this year I would save a third ($2,100) of that in taxes. It seems equivalent to earning a $2,100, risk-free, after-tax return in return for making a one year loan (the loan in this case is paying the $6,300 a year before I would otherwise pay it).

First, is this line of thinking accurate? Second, how extreme can you go in this direction (i.e. can I pre-pay 5 or 10 years now? and wouldn't pre-paying now insulate me from the risk that the current tax reform proposal might strip away property tax deductions in future years?).

Thanks in advance to Keith or any other wise, wealthy accountants who can help me think through this situation.
« Last Edit: November 25, 2017, 12:11:26 PM by DallasFI »

Veiled

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Re: Pre-paying property taxes - huge risk-free rate of return?
« Reply #1 on: November 25, 2017, 10:00:03 PM »
Hi Dallas! Welcome to the forum. I'm not an accountant but I'll give this a shot as a fellow investor:
1. Yes, this line of thinking is accurate.

2. People typically pay 2 years worth (pay year 1 in early January of year 1 and year 2 in late December of year 1) and take the standard deduction in year 2 because of the lack of flexibility in the entities collecting property taxes. Every place is a little different, but if you are indeed from Dallas then this page/phone number might be useful to you. You may note that this CTA accepts past years' balances but there are no permissions for future years extended on this page. A phone call might clear this up for you, but in general municipalities don't want to be in your debt, and you don't want them to forget you pre-paid for 10 years in all their red tape.

3. Just like there is non-unique market risk to every portfolio (i.e. the risk of total stock indices), there are non-unique political risks to every portfolio (i.e. laws about RMDs, contributions, and taxes). At any point, congress can change the rules. Just like JL Collins says, modify your unique risk and accept the rest.  Accept the fact that we may all lose (or gain?) the ability to avoid future tax with various legislative events. It doesn't make sense to put 10 years of money into the city of Dallas' hands and possibly get into a big headache in 8 years, just to save some taxes this year.

Edited for spelling.
« Last Edit: November 26, 2017, 05:47:51 AM by Veiled »