As a property owner, you must pay annual taxes assessed by the state and/or local government based on the value of your property. However, you can claim a property tax deduction on some or all of the property taxes paid if you use the property for personal use and itemize deductions on your federal tax return.
Deductible real estate taxes encompass payments made during closing on a home purchase or sale, as well as payments made to the county or town’s tax assessor based on the property’s assessed value. The IRS defines real property as including a main home, vacation home, land, or foreign property.
Note that the Tax Cuts and Jobs Act (TCJA) capped the property tax deduction, along with other state and local taxes, starting 2018. The cap is set at $10,000 ($5,000 for those married filing separately) to replace the previously set unlimited deduction.
What Property is Tax Deductible?
You can deduct property and real estate taxes you pay on your:
- Primary home
- Co-op apartment
- Vacation homes
- Property outside the United States
- Cars, RVs and other road vehicles
What Property is Not Deductible?
You cannot avail of property tax deductions for:
- Property you don’t own.
- Property taxes you haven’t paid yet.
- Homeowners association assessments.
- Assessments to facilitate the construction of streets, sidewalks, water, and sewer systems in your neighborhood.
- Transfer taxes when you sell a house.
- Payments on loans that finance energy-saving home improvements.
Note: You cannot deduct more than $10,000 ($5,000, if married, filing separately) for a combination of property taxes and either state and local income taxes or sales taxes.
Itemized Property Tax Deduction
The Tax Cuts and Jobs Act has limited the deduction for state and local taxes, including property taxes, to $10,000 ($5,000 for married individuals filing separately). If you have paid more in taxes throughout the year, you will not be able to claim the entire amount of your property taxes. This cap covers a combination of taxes, including property taxes, state and local income and sales taxes.
Also know about: Decreasing capital gains tax on a property sale
The Tax Cuts and Jobs Act limited the deduction for property taxes but increased the standard deduction by almost double. It’s worth mentioning that the standard deduction is adjusted for inflation each year, resulting in a continued increase.
Claiming Property Tax Deduction
To take advantage of the property tax deduction, you should proceed if the total of your itemized expenses exceeds the standard deduction for the year. However, before proceeding, there are some steps you need to complete.
Double-Check the Eligibility of your Deductions
Take another look at the deductions made. Make sure you didn’t miss anything and that the information is accurate. This will make filing taxes easier and help you save more money.
Get a Copy of your Tax Records
It’s important to have a record of your property tax bills, which the government usually sends twice a year. If you don’t have a copy, contact your local tax authority. This information will help you accurately determine the taxes you paid in a given year and what you can deduct in the next. Keep in mind, you can only deduct the taxes you actually paid in a particular year.
Check your Escrow Account
If you pay your property taxes through an escrow account, your lender will provide you with a 1098 statement for tax purposes. This statement will show how much mortgage interest you paid that can be deducted, and it will also give details on the property taxes the lender paid for you.
Use Schedule A to File
Once you have verified your deductions and gathered the necessary documentation, you can proceed to complete IRS Schedule A. This schedule will allow you to claim your property tax deduction with ease and clarity.
Deduct your property taxes in the year you pay them
There is a common mistake people make when paying property taxes. Some people pay their property taxes in one lump sum, while others set aside money each month. However, when it comes to tax deductions, only the actual amount paid during the year can be claimed.
Taxes paid through escrow accounts
Don’t confuse escrow payments with deductible property taxes. Escrow payments are adjusted annually but may not match the amount actually paid to the tax authority.
Key things to keep in mind:
- Property tax deduction discriminates against renters and promotes debt.
- Property tax deduction promotes homeownership.
- Capped property tax deduction at $10,000 ($5,000 if married filing separately) under TCJA.
- Previous law had no limit on property tax deduction.
- Interest on homes capped at $750,000 worth of debt under new law.
- Fewer homeowners to itemize due to standard deduction increase.
- Standard deduction for tax year 2022: $25,900 for couples and $12,950 for single filers.
- Standard deduction for tax year 2023: $27,700 for married couples, $13,850 for single filers, $20,800 for heads of household.