The Ins and Outs of Property Tax Deduction

Curious How the Property Tax Deduction Works? Here’s a Guide to Help You Out.

The property tax deduction is one of many benefits of being a homeowner, although surprisingly, you don’t even need to own a home qualify for this tax break. Read on to find out more about the property tax deduction and how you can claim it on your tax return.

What’s deductible

Property tax deductions are available for property and real estate taxes you pay on your:

• Primary home
• Co-op apartment
• Vacation homes
• Land
• Property outside the United States
• Cars, RVs and other vehicles
• Boat(s)

In 2018, the IRS announced a new limit on property tax deductions, allowing for of up to $10,000 ($5,000 if married filing separately) to be deducted on a combination of property taxes and either state and local income taxes, or sales taxes.

What’s not deductible

The IRS doesn’t allow property tax deductions for:

• Property taxes on property you don’t own
• Property taxes you haven’t paid yet
• Assessments for building streets, sidewalks, or water and sewer systems in your neighborhood. (Assessments or taxes for maintenance or repair of those things are deductible, though.)
• The portion of your tax bill that’s actually for services — water or trash, for example
• Transfer taxes on the sale of a house
• Homeowners association assessments
• Payments on loans that finance energy-saving home improvements. (The interest portion of your payment might be deductible as home mortgage interest, however.)
• More than $10,000 ($5,000 if married filing separately) for a combination of property taxes and either state and local income taxes or sales taxes.

How to take the property tax deduction

Start by finding your tax records – your local taxing authority should be able to give you a copy of the tax bill for your home. Meanwhile, scrutinize the registration paperwork on your car, RV, boat or other movable assets, as might be paying property taxes on those as well.

Exclude any taxes that the IRS won’t count. For example, you can deduct a property tax only if it’s assessed at a similar rate as other like properties in the community. The proceeds have to help the community, not pay for a special privilege or service for you.

Use Schedule A when you file your return – that’s where you’ll figure your deduction. Note: This means you’ll need to itemize your taxes instead of taking the standard deduction. It’ll probably take more time to do your taxes if you itemize, but you will likely leave you with a lower tax bill.

Deduct your property taxes in the year you pay them. Sounds simple, but it can be tricky, as there are two ways people typically pay property taxes on a house. Either you’ll write a check once or twice a year when the bill comes – simple and straightforward; or, you may set aside money each month in an escrow account when they pay the mortgage. If you’re paying your property taxes using the second method, you’ll need to stay organized, so you’re only deducting the actual tax paid that year, not all the money in escrow.

Special Circumstances

If you bought or sold your house this year: If you owned a taxable property for part of the year before selling it, you can usually deduct the taxes attributable to the time you owned the property. So, if you sold your house in July, you would deduct the first half of the year’s property taxes on the house, and the buyer would deduct the second half.

Renters: Renters might qualify for a property tax deduction on their state taxes.

How to get a bigger property tax deduction

1. Prepay your property taxes. If your semiannual tax bill is due next April but you pay it early — say, this December — you can deduct it this year instead of next year.
2. Save your registration statements. When it’s time to renew your registration on a vehicle, check if any part of the fee is actually property tax. There could be a tax deduction hiding in there.
3. Scrutinize your closing paperwork. If you bought or sold a house, go back and look at what you paid at closing for property taxes. After the tax assessor has a chance to revalue the property, you might get a second tax bill.