Are Property Taxes Deductible
Despite the fact that paying property taxes can be a financial burden, the property tax deduction allows taxpayers to deduct these costs when filing their taxes. When it comes time to file your taxes, it’s critical to understand how property taxes operate, what expenses are tax deductible, and how much you can deduct.
What Exactly Is a Deduction for Property Taxes?
Taxpayers who itemise their federal income tax deductions may be able to deduct state and local property taxes paid on their real estate and personal property. Annual property taxes on the assessed value of your property, as well as taxes paid at the time of sale or purchase of real estate property, are included in this category of taxes.
If a property owner uses the property for personal use and itemises deductions on their federal tax return, they may be able to deduct some or all of their property taxes. If the total of all qualified itemised deductions exceeds the standard deduction, this makes sense.
In 2018, the TCJA restricted the deduction for state and local property taxes. Maximum state and local tax deduction is $10,000 (or $5,000 if married and filing separately). This includes property taxes. The property tax deduction had never been capped prior to the passage of the TCJA.
In addition to property taxes, this ceiling includes a variety of other taxes. There is also a limit on the amount of state and local taxes that can be collected (also known as the SALT limit).
What Can Be Deducted from Your Taxes?
You may be able to deduce some of these things:
- “Primary dwelling”
- Holiday house
- Foreign real estate, if applicable
What Isn’t Tax Deductible?
How do you know? You may not be able to.
- Non-tax: owner’s tax on someone else’s property
- Rental or commercial property taxes
- Taxes that you haven’t paid yet
- Taxes incurred when a house is sold
- Renovating a house
- Refinancing energy-saving renovations
- Improvements to the local area
- Services such as trash removal or water
- Property taxes and state and local income taxes or sales taxes totaling more than $10,000 ($5,000 if married and filing separately).
- Assessments made by homeowner’s associations.
Using an Escrow Account to Pay Property Taxes?
Your lender will send you a 1098 statement if you use an escrow account to pay your property taxes. An itemised analysis of the property tax payments that have been paid on your behalf will be included in the statement. Only the amount the lender reports to the IRS on Form 1098 can be deducted.
How to Deduct Real Estate Taxes
The following steps will show you how to deduct your property taxes from your taxable income:
- Don’t waste your time claiming property taxes if using the standard deduction lowers your tax burden. You can only deduct your property taxes if you want to itemise your deductions.
- If you paid your own property taxes, gather bank statements or visit your city’s tax assessor’s website and search for your tax records. Your lender should send you a 1098 statement if you paid using an escrow account.
- You’ll need to use Schedule A to file your taxes if you’re claiming deductions on a per-item basis.
Tax Deduction in the Year of Purchase of Real Estate
Taxes paid by the seller prior to the date of sale are deductible for federal income tax reasons. Taxes begin to accrue on the day of the transaction, and you (the buyer) are responsible for them. Regardless of the lien dates in the local law, this applies. The settlement statement you receive at closing usually includes this information. Even if the seller paid all of the taxes, you and the seller are each regarded to have paid your respective part. The year the property is sold, each of you can deduct your own portion if you itemise deductions.
Exempt from Deductible Costs
Taxes imposed by the government on homes aren’t deductible for everyone. Taxes on the following things are not tax deductible.
Charges for the use of a certain service
In the eyes of the IRS, even if a taxing body receives payment for a specific service, the charge is not taxed. If it’s: You can’t deduct the charge:
- In some cases, you’ll be charged per 1,000 gallons of water you use, such as $5 per 1,000 gallons.
- Whether it is an annual service price (such as $240 for garbage removal) or a one-time charge
- For example, if your grass had grown higher than permitted in your municipal regulation, you may be charged a $30 fee to have it mowed by your local government.
Look over your property tax bill to see if any nondeductible itemised items are listed. Ask for a copy of your real estate tax bill if you don’t receive one from your taxing body or lender. If you have questions regarding a particular charge on your account, you should get in touch with the taxing authorities.
Local benefit assessments are carried out.
Amounts paid for local benefits that tend to raise the value of your property are also not deductible. Streets, walkways, and water and sewer systems are all examples of local advantages. For tax purposes, you must include these sums in the overall valuation of your property. You’ll be able to lower your taxable profit by increasing your basis in this manner.
If you pay a special assessment for your property’s upkeep, repairs, or interest, you can deduct that portion of the assessment from your taxable income. Only if the taxing authority delivers you an itemised tax bill detailing the costs of construction, interest, and upkeep, may you claim this deduction.
Example: A city charged property owners a front foot benefit charge for the installation of a water infrastructure that benefited them. According to the city’s tax statement, construction of the water infrastructure as well as interest and maintenance charges were all separately categorised. Interest and maintenance costs could be deducted from tax returns.
The $10,000 annual property tax deduction cap
You might deduct all of your home’s property taxes up to and including the amount you paid in before 2018. This allowed people with big property tax payments and luxury residences to obtain significant deductions. The property tax deduction was reduced from $12,000 in 2017 to $10,000 in 2018 under the Tax Cuts and Jobs Act. The $10,000 annual cap is based on the entire amount you pay, not just the amount you pay each month.
Property taxes imposed by both the state and the local government
- state and municipal taxes on the value of personal property
- local property taxes, as well as state and local
- instead of state income taxes, state and local sales taxes are deducted.
In this case, George pays $12,000 in property taxes each year on a $1 million home. In addition, he had to fork over an additional $10,000 in state income taxes. Each year from 2018 through 2025, he can deduct $10,000 of these funds. There is no tax benefit for the remaining $12,000
To Deduct Property Taxes, You Must Itemize.
On IRS Schedule A, property tax is listed as an itemised deduction. Rather than taking the standard deduction, you must itemise your personal deductions in order to deduct your property taxes. The standard deduction was increased to $12,000 for solo taxpayers and $24,000 for married couples who file jointly as a result of the Tax Cuts and Jobs Act (as almost all do).
If all of your itemised deductions surpass the $12,000 (single) or $24,000 (marriage) level, you should itemise your deductions on Schedule A. There will be substantially fewer taxpayers who will be able to itemise their deductions because the standard deduction is now so high. Millions of people who owe property taxes won’t be able to deduct those payments as a result.
This married couple pays $3,000 in property taxes and another $2,000 in state income tax each year. Instead of itemising, they opt for the $24,00 standard deduction, which saves them $8,000 in itemised deductions. There is no property tax deduction for them.
It’s possible that many homeowners who can’t deduct property taxes will still be better off because of other tax cuts that have been enacted as a result of the Tax Cuts and Jobs Act.