How to Deduct Real Estate Taxes on Your Federal Tax Return
Owning a home comes with a ton of benefits and one of those is your ability to deduct real estate taxes on your federal tax return. The savings may not stop there, in many cases you can also deduct the taxes paid on certain personal property types such as boats, cars or recreational vehicles.
We thought it might be helpful to have a look at the property tax deduction and how you can claim it at tax time.
What is a property tax deduction?
States, cities and counties all levy property taxes on the various types of property that you own, this can include real estate, boats, vacation homes, recreational vehicles as well as land that is sitting empty.
Many of these taxes can be deducted from your federal taxes, including any taxes that may have been paid when closing on the sale or purchase of a property.
However, if you are buying a home that has a tax lien on it and you are paying off the delinquent taxes, you cannot deduct these expenses from your taxes, they are considered part of the cost of purchasing the home and not a property tax expense.
When it comes to the amount you can deduct, it is only the amount of your escrow account that your bank reports to the IRS, this is due to the fact that your escrow account is adjusted on a year basis and in most cases the amount changes year to year.
What property is eligible for the deduction?
There are a number of different types of property that are tax deductible:
- Primary residence
- Investment property
- Vacation home
- Land
- Boat
- Recreational vehicle
- Car
What property isn’t eligible?
The IRS prevents you from deducting taxes paid on the following types of property:
- Taxes on non-owned property
- Transfer taxes on a home sale
- Service fees for water, sewer, and trash pickup
- Homeowners association fees
How does a property tax deduction work?
The type of personal property that is taxable will vary by state county and even municipality as well as how you should calculate a properties taxable value. We are going to look at how real estate taxes are calculated but the specifics may vary depending on where you live so always check with a local tax professional.
In most cases, real estate taxes are levied on your home as well as the land. A local tax assessor will determine the value of your property and that number is multiplied by the local municipality’s tax rate to calculate your total tax bill.
As an example, if your home is valued at $400,000 and the local tax rate is 1.25% your tax bill for that year would be $5,000
What property tax deduction can you take?
Prior to the 2018 tax year, there wasn’t a cap on the deduction you could take for property but that changed with the passage of the 2017 Tax Cuts and Jobs Act which capped the deduction at $10,000 or $5,000 if married filing separately.
In most cases, it only makes sense to itemize your deductions and take the property tax deductions if your total tax deductions exceed $25,900 for joint filers or surviving spouses and $12,950 for single filers or married filing separately, or $19,400 for heads of household. These are the 2022 standard deductions amounts, which can change from year to year so be sure to check for the latest numbers.
How to claim the property tax deduction
If you decide to claim the property tax deduction, you can do so by completing a Schedule A (Form 1040 PDF) and submitting it to the IRS with your 1040 income tax form. The Schedule A is the form taxpayers use to calculate itemized deductions.
Keep in mind if you opt to itemize deductions, your taxes will likely take longer to complete. Still, the extra time could be worth it if you end up with a lower tax bill or a larger return.