Property Tax Deduction: How to Write off Real Estate Tax?

KEY TAKEAWAYS

• The property tax deduction includes a range of real estate taxes that are generally deductible from the property owner’s adjusted gross income, and therefore reduce the amount of their taxable income federal income tax.
• Property taxes are assessed by both local and state governments on an annual basis and are based on the value of a property.
• Beginning in 2018, the total deduction for state and local taxes is capped at $10,000, and this includes property taxes. The deduction is limited to $5,000 even if you are married and filing taxes separately.

What Is the Property Tax Deduction? 

Most state and local governments charge a tax on the value of real property. The real estate tax is assessed annually. The cost of the tax can be deducted if it was paid on an owned property that wasn’t used for business. Additionally, the tax has to be imposed uniformly at a like rate on all real property throughout the community and used for general community or governmental purposes.

The property tax deduction relates to the state and local property taxes that property owners deduct from their adjusted gross income (AGI). Real estate taxes that are generally deductible include any, state, and local taxes levied for the welfare of the general public. You cannot deduct foreign taxes paid on real estate.

Certain home improvements such as adding an in-ground pool or finishing a basement may increase your property taxes, while home renovations like painting, removing a wall, or adding a patio will not. Starting in 2018, the Tax Cuts and Jobs Act (TCJA) implemented new changes to the property tax deduction. This included a $10,000 cap for the amount of state and local taxes that can get deducted.

However, if you are married filing taxes separately from your spouse the deduction limit is $5,000. Before these changes were implemented, there was no cap on how much property owners could deduct from their taxes.

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. 

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 deductions. With all of that said, property taxes are divided into personal property taxes and real property taxes. 

Personal Property Taxes

Personal property includes furnishings, machinery and equipment, fixtures, supplies, and tools. Most personal property owned by individuals is exempt from property taxes. However, if these items are used in a business, personal property tax applies. 

Each and every locale has its own list of taxable property types. Many factors determine property values and tax rates and the amount of property tax due on comparable properties will vary throughout a county. 

Real Property Taxes 

Real property includes land, improvements to land, structures, and certain equipment affixed to structures. 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 

Before 2018, there was no cap or limit on the amount property owners could deduct from their federal tax returns. After the Tax Cuts and Jobs Act (TCJA) was introduced in 2017, state and local taxes were capped at $10,000—or $5,000 if you’re married but filing separately—starting in the 2018 tax year. The new law also limited the amount of mortgage interest that can get deducted.

If a homeowner wants to deduct mortgage interest, the deduction amount is limited to $750,000 worth of debt. Before the new law was implemented, this amount was $1 million. It was one of the biggest advantages if you purchased the property prior to 2018.

Home mortgage interest deduction on homes purchased on or before December 15, 2017, remains at $1 million as a special exemption. Since the total standard deduction increased in 2018, it led 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 real and 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.

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: 

• Taxes paid on main or primary residence
• Vacation home(s)
• Land
• Boats 
• RVs, cars, and other types of vehicles 

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 
• Real estate taxes paid on property owned in a foreign country

Summary

The property tax deduction relates to eligible property taxes that can get deducted on 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.

Written by Sandra Habiger, CPA

Sandra Habiger is a Chartered Professional Accountant with a Bachelor’s Degree in Business Administration from the University of Washington. Sandra’s areas of focus include advising real estate agents, brokers, and investors. She supports small businesses in growing to their first six figures and beyond. Alongside her accounting practice, Sandra is a Money and Life Coach for women in business.

Written by Sandra Habiger, CPA

Sandra Habiger is a Chartered Professional Accountant with a Bachelor’s Degree in Business Administration from the University of Washington. Sandra’s areas of focus include advising real estate agents, brokers, and investors. She supports small businesses in growing to their first six figures and beyond. Alongside her accounting practice, Sandra is a Money and Life Coach for women in business.