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Property Tax Deduction: How to Write off Real Estate Tax

Updated: November 25, 2022

Are you an avid real estate investor? Maybe you have just purchased your first home or are deciding to sell for the first time. No matter where you land, there can be lots to know and many moving parts to understand. But did you know that there are certain property taxes that you can write off?

Doing this can provide you with a nice tax break. So if you want to learn more about the property tax deduction and how it works, keep reading! We wrote this article to dive into everything you need to know, including how to claim it, the pros and cons, and what is actually tax deductible.

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    KEY TAKEAWAYS

    • The property tax deduction includes a range of taxes that are generally deductible from the property owner’s federal income tax.
    • Property taxes get assessed by both local and state governments on an annual basis and it’s based on the value of a property.
    • Beginning in 2018, the total deduction for state and local taxes was capped at $10,000, and this includes property taxes. The deduction gets capped at $5,000 if you are married and filing taxes separately.

    What Is the Property Tax Deduction? 

    The property tax deduction relates to the state and local property taxes that property owners deduct from their federal income taxes. Real estate taxes that are generally deductible include any foreign, state, and local taxes levied against the welfare of the general public. 

    It’s worth noting that taxes do not get charged if a property owner undergoes various home renovations or takes part in trash collection, for example. Starting with the 2018 taxes, the Tax Cuts and Jobs Act (TCJA) implemented new changes to the property tax deduction. This included a cap for the amount of state and local taxes that can get deducted at $10,000.

    However, if you are married or filing taxes separately from a partner, the capped deduction limit only reaches $5,000. Before these changes were implemented, there was no cap on how much property owners could deduct from their taxes.

    Turn Tax Pains Into Tax Gains

    How Does the Property Tax Deduction Work?

    If you own property or other types of real estate and you pay taxes, certain payments might be deductible. State and local tax authorities often take the value of homes located in a certain area into account when calculating property taxes. 

    So, when you file your federal income tax return you can claim the property tax deduction by filling out Schedule A of Form 1040. It’s important to note that to claim the property tax deduction, you must itemize your dedications. 

    But with all of that said, property taxes can get split into personal property taxes and real property taxes. 

    Personal Property Taxes

    There are some local and state authorities that consider property taxes based on the type of property you own and if it produces income. For example, this could include equipment and tools. 

    Each and every locale has its own list of taxable property types. They will also specify how you determine the taxable value of an item. 

    Real Property Taxes 

    When you itemize your tax returns, certain property taxes can get deducted on real estate owned—including your main residence. This includes any property taxes that need to get paid starting from when the property is purchased. The total amount of deductible taxes was capped at $10,000 starting in 2018. 

    Advantages and Disadvantages of the Property Tax Deduction 

    One of the biggest challenges of the property tax deduction is that it disadvantages renters, ultimately leading to some property owners having to take on additional debt. Before 2018, there was no cap or limit on the amount property owners could deduct from their federal tax returns. 

    Yet, after the Tax Cuts and Jobs Act (TCJA) was introduced in 2017, it now meant state and local taxes were capped at $10,000—or $5,000 if you’re married but filing separately—starting in 2018. As well, the new law limited the amount of mortgage interest that can get deducted.

    In this case, if a homeowner wants to deduct mortgage interest, the amount they pay is limited to $750,000 worth of debt. Before the new law was implemented, this amount was $1 million. But through this comes one of the biggest advantages if you owned the property prior to 2018.

    Any interest on homes purchased on or before December 15, 2017, remains guaranteed at the previous rate as a special exemption. Since the total standard deduction changed in 2018, it started to lead to fewer homeowners itemizing their deductions. Ultimately, this will reduce the number of property owners that claim the property tax deduction. 

    How to Claim a Property Tax Deduction 

    If you want to claim a property tax deduction there are a few important pieces of information to be aware of beforehand. Any tax to be deducted has to apply to the value of the personal property. It also must be charged annually. 

    For example, if you only had to pay state tax on a property at the time it was purchased, it won’t meet the definition of a deductible property tax. These details are all outlined by the Internal Revenue Service (IRS). 

    You can only deduct property taxes if you itemize the deductions. If all of your eligible expenses are greater than the allowed standard dedication amount in a given tax year it can be helpful to itemize your deductions. 

    Once you have all your information, claiming the property tax deduction is as easy as submitting Schedule A of Form 1040. 

    It's Time For Owners To Own Tax Season

    What Property Is Tax Deductible? 

    According to the IRS, only certain property taxes are able to get deducted from your federal income tax return. This includes a combination of local and state income taxes and sales taxes

    Here are some of the most common types of property tax you can deduct: 

    • Main or primary home
    • Vacation home(s)
    • Land
    • Boats 
    • RVs, cars, and other types of vehicles 
    • Property that’s owned outside of the United States 

    It was mentioned above, but you can only deduct up to $10,000 or $5,000 if you’re married but filing separately. 

    What Property Is Non-Deductible? 

    Even though a fair amount of property tax can get deducted, there are certain property tax deductions the IRS does not allow. Non-deductible property tax includes: 

    • Property taxes that haven’t been paid yet 
    • Property taxes on property that you do not own 
    • Transfer taxes that occur after the sale of a house 
    • Assessments by the homeowners association
    • Any services that are outlined on your tax bill 

    Summary

    The property tax deduction relates to eligible property taxes that can get deducted from your federal income tax return. Some of the most common types of deductible property tax include the main home, a vacation home, boats, RVs, cars, and other vehicles. 

    Deductible property tax payments do not include taxes that get charged for services or home renovations. The amount that you can deduct is capped at $10,000 for state and local taxes or $5,000 if you’re married but filing separately. 

    The IRS implemented new tax rules in 2018 that saw these changes come into effect. Before the changes, there was no cap on the amount of property taxes that can get deducted. These new changes impact property tax savings. If you still have questions, speak with your tax assessor or financial advisor.

    Less Taxin'. More Relaxin'

    FAQs About Property Tax Deduction

    What Are Property Taxes?

    Property taxes are taxes you pay on the property you own. The IRS takes into consideration the location and value of homes in the area to calculate property taxes.

    Does Standard Deduction Include Property Tax?

    Yes, the standard deduction includes deductible perusal expenses for charitable contributions, home mortgage interest, medical expenses, and property tax.

    Is Property Income Tax Deductible?

    Yes, as long as you itemize the deductions and file the appropriate form with the IRS. This would be Schedule A of Form 1040 for eligible homeowners.

    How Do You Calculate Annual Property Tax?

    The easiest way to calculate your annual property tax is to multiply the value of your home by the levy. For example, a $250,000 home with a 4% property tax rate would have roughly $10,000 in annual taxes.

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