How Much of Your Property Taxes Are Tax Deductible?

Good news, homeowner! Uncle Sam offers a break on your property taxes, but the amount you can deduct isn’t unlimited. Generally, you can deduct the actual amount of real estate taxes you paid during the tax year, up to a limit of $10,000 if you’re single, married filing jointly, or head of household. For those married filing separately, the limit is $5,000.

Navigating the Property Tax Deduction Maze: A Comprehensive Guide

The deduction for state and local taxes (SALT), which includes property taxes, is a valuable benefit for homeowners. However, the Tax Cuts and Jobs Act of 2017 placed a cap on the amount that can be deducted. Understanding the rules surrounding this deduction is crucial for maximizing your tax savings.

Understanding the SALT Deduction

The SALT deduction allows taxpayers to deduct certain state and local taxes from their federal income tax. Before 2018, there was no limit to the amount of SALT you could deduct. However, the current law limits the deduction to $10,000 per household, regardless of your actual property tax burden.

What’s Included in Property Taxes?

Property taxes, also known as real estate taxes, are taxes levied on real property, such as land and buildings. These taxes are typically used to fund local services like schools, roads, and emergency services. For the purpose of the SALT deduction, the following types of taxes qualify as property taxes:

• General real estate taxes: These are the most common type of property tax, levied annually based on the assessed value of your property.
• Taxes for specific improvements: If your property taxes include an assessment for improvements that benefit the entire community, like sidewalks or sewers, these are also deductible.

What’s Not Included in Property Taxes?

Certain fees or charges associated with your property may not be deductible as property taxes. These include:

• HOA fees: Homeowners Association fees are generally not deductible.
• Charges for services: Fees for specific services like trash collection or water bills are not deductible, even if they’re included on your property tax bill.
• Special assessments for individual benefits: Assessments for improvements that directly benefit your property, such as a new driveway, are generally not deductible.

Calculating Your Deductible Property Taxes

To calculate your deductible property taxes, you’ll need to review your property tax statements and identify the portion that qualifies as deductible real estate taxes. Remember to exclude any non-deductible fees or charges.

The $10,000 Limit

Keep in mind the $10,000 limit for the SALT deduction. If your total state and local taxes (including property taxes, state income taxes, or sales taxes) exceed $10,000, you can only deduct up to that limit.

Itemizing vs. Standard Deduction

To claim the property tax deduction, you must itemize your deductions on Schedule A of Form 1040. This means you’ll need to forego the standard deduction, which is a fixed amount based on your filing status. You should only itemize if your total itemized deductions (including property taxes, mortgage interest, charitable contributions, and other eligible deductions) exceed the standard deduction for your filing status. For 2023, the standard deductions are:

• Single: $13,850
• Married Filing Jointly: $27,700
• Head of Household: $20,800
• Married Filing Separately: $13,850

Record Keeping is Key

Maintaining accurate records is essential when claiming the property tax deduction. Be sure to keep copies of your property tax statements, payment receipts, and any other documentation that supports your deduction. These records will be invaluable if you ever need to substantiate your deduction to the IRS.

Common Pitfalls to Avoid

• Exceeding the $10,000 limit: Don’t try to deduct more than the $10,000 limit for the SALT deduction.
• Including non-deductible fees: Be careful to exclude any non-deductible fees or charges from your property tax calculation.
• Forgetting to itemize: Remember that you must itemize your deductions to claim the property tax deduction.
• Lack of documentation: Keep accurate records of your property tax payments to support your deduction.

Frequently Asked Questions (FAQs)

1. What if my property taxes are escrowed through my mortgage?

If your property taxes are paid through your mortgage escrow account, you can deduct the amount your mortgage servicer actually paid to the taxing authority during the tax year. Your mortgage servicer will typically provide you with a statement (Form 1098) showing the amount of property taxes paid.

2. Can I deduct property taxes on a second home?

Yes, you can deduct property taxes on a second home, subject to the same $10,000 SALT limit. The deduction applies as long as you own the property and are legally liable for the taxes.

3. What if I own rental property?

If you own rental property, your property taxes are generally deductible as a business expense on Schedule E of Form 1040, rather than as an itemized deduction. This means the $10,000 SALT limit does not apply.

4. Can I deduct property taxes I paid in a prior year?

No, you can only deduct property taxes paid during the current tax year. If you paid property taxes late in a prior year, you can deduct them in the year you actually paid them.

5. What if I sell my home during the year?

If you sell your home during the year, you can deduct the portion of the property taxes that is allocable to the period you owned the home. This will typically be reflected on the settlement statement from the sale.

6. Can I deduct property taxes if I receive a property tax rebate?

If you receive a property tax rebate from your state or local government, you must reduce your deductible property taxes by the amount of the rebate.

7. What if I split ownership of a property with someone else?

If you co-own a property, you can deduct the portion of the property taxes that you actually paid.

8. Are property taxes deductible if I work from home?

If you work from home, you may be able to deduct a portion of your property taxes as a home office deduction. However, this deduction is subject to certain rules and limitations. Consult with a tax professional to determine if you qualify.

9. How do I prove I paid my property taxes?

You can prove you paid your property taxes with copies of your property tax statements, payment receipts, or your mortgage servicer’s statement (Form 1098).

10. What if I live in a state with no state income tax?

Even if you live in a state with no state income tax, you can still deduct your property taxes, subject to the $10,000 SALT limit.

11. Are property taxes deductible for trusts and estates?

Property taxes are often deductible for trusts and estates, but the rules can be complex. Consult with a tax professional or estate planning attorney for specific guidance.

12. Does the SALT deduction limit affect everyone?

No, the SALT deduction limit only affects taxpayers whose total state and local taxes (including property taxes) exceed $10,000. If your total SALT is below $10,000, you can deduct the full amount.