How to claim your property tax deduction
Owning a home comes with certain tax benefits. One such benefit is the ability to deduct property taxes on your federal tax return. In addition to property taxes, you can also deduct taxes on certain types of personal property, including boats, cars, or recreational vehicles.
Although the 2017 legislation changed the rules for property tax deductions, taking this deduction instead of the standard deduction might still make sense in some cases.
Here’s what to know about the property tax deduction, how it works, and how to claim it.
What is a property tax deduction?
Counties, cities, and states levy property taxes on various types of property. Ownership can include real estate, recreational vehicles, boats, land, vacation homes and more.
“Homeowners can deduct state and local taxes that have been paid on their property from their federal income taxes,” says Shmuel Shayowitz.
president and director of loans at Approved Funding, “This includes annual property taxes as well as taxes that may have been paid at closing when the property was sold or purchased.”
But homebuyers who repay past-due tax liens from previous years at closing aren’t allowed to deduct them from federal taxes. Such payments should be treated as part of the cost of purchasing a property rather than a property tax deduction.
If you pay property taxes by depositing money into an escrow account each month as part of your mortgage payment, the full payment should not be treated as a property tax deduction. Only the amount that the bank reports to the Internal Revenue Service (IRS) is eligible for the deduction. This is because the amount you pay into an escrow account is adjusted each year to be as close as possible to the exact amount owed, but it’s never exactly the same amount.
What type of property is eligible for the deduction?
Eligible property tax deductions may include:
- Principal residence
- Investment property
- Vacation home
What type of property is not eligible?
According to IRS regulations, you cannot deduct the following taxes:
- Taxes on non-owned property
- Transfer tax on the sale of a house
- Service charges for water, sewer and garbage collection
- Homeowners Association Fee
How does the property tax deduction work?
Each state, county, and municipality has its own list of taxable personal property types and specifies how taxpayers should determine an item’s taxable value. Here, we will focus on property taxes and how they are calculated. However, it is important to note that the way homes are assessed and taxes are calculated may vary depending on where you live.
Property taxes are levied on both your home and the land it sits on. A tax assessor determines the value of your property, which is then multiplied by your municipality’s tax rate to determine your total tax bill. So if the assessed value of your home is $300,000 and your local tax rate is 1.05%, your tax bill would be $3,150.
How big of a property tax deduction can you take?
Prior to the 2018 tax year, there was no cap on the property tax deduction, but in the case of large deductions, the alternative minimum tax may apply. But after the passage of the Tax Cuts and Jobs Act of 2017, that deduction was capped at $10,000 (or $5,000 if you’re married and filing separately).
So it probably only makes sense to itemize and deduct your property taxes if your total deductions exceed the standard 2022 deduction, which is $25,900 for joint filers or surviving spouses, $12,950 for single filers. or married filing separately, or $19,400 for heads of households. Consider speaking to a tax expert if you have questions about whether to itemize or take the standard deduction.
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 and submitting it to the IRS along with your income tax form 1040. Schedule A is the form taxpayers use to calculate itemized deductions.
Keep in mind that if you choose to itemize deductions, your taxes will likely take longer to complete. Still, the extra time might be worth it if you end up with a lower tax bill or a bigger return.