Is Property Tax Deductible?
When you purchase a home, you’ll be required to pay various fees, such as homeowner’s insurance and property taxes.
Property taxes are paid to local governments to fund essential services like schools, police, and fire departments. Unfortunately, depending on where you live and the value of your home, property taxes can be costly.
Paying property taxes has tax and financial implications, so you might wonder, “Is property tax deductible?” Keep reading to learn more about property taxes and when you can deduct them from your tax returns to reduce your financial burden.
- Property tax is deductible for a wide range of properties, but there are limitations.
- You can only deduct property taxes on your tax return if you take the itemized deduction.
- The cap for property tax is $10,000 for single or married couples filing jointly and $5,000 for couples filing separately.
What Are Property Taxes?
Property taxes are imposed by local governments like cities, townships, and counties. Anyone who owns property and pays taxes on it, whether residential or commercial, pays property taxes.
The amount individuals pay varies greatly depending on their location and the value of the property. Each county typically has its own property tax rate.
In many cities, property taxes are the main source of revenue for local governments and fund public services and infrastructures like police and fire departments, schools, garbage collection, and so forth.
What Is the Property Tax Deduction?
So is property tax tax-deductible? In some cases, the property tax deduction is a benefit that allows property owners to deduct the amount they pay in property taxes from their income when filing income tax returns in April of every year. Taking deductions effectively reduces your taxable income, lowering your overall tax liability.
In the US, property taxes can typically be deducted up to a certain limit when using itemized deductions. The IRS allows homeowners to write off state and local property taxes on their federal returns, but you must itemize your deductions rather than taking the standard deduction.
The general cap on how much you can deduct is $10,000 per year or $5,000 if you’re married and filing taxes separately.
Properties Eligible For Tax Deduction
Of course, there are different types of property other than real estate properties. Personal property refers to any property that’s not real estate. So is personal property tax deductible? The good news is that you don’t have to be a homeowner to take advantage of property tax deductions. You can take deductions on the following types of property:
- Primary residence
- Vacation homes
- Rental properties
Non-Deductible Property Tax Payments
Tax deductions aren’t available for all types of property taxes. Non-deductible property tax payments include:
- Taxes on property you don’t legally own
- Unpaid property taxes
- Tax assessments
- The portion of the property tax bill that’s for various services
- Taxes on the sale of the property
In addition, any amount that exceeds the $10,000 property tax deduction limit does not qualify for a deduction.
How Much Can Be Deducted?
Unfortunately, you can’t deduct all your property taxes. The Tax Cuts and Job Act (TCJA) of 2018 introduced a cap on the total deduction for all state and local taxes, including property taxes. Currently, the maximum deduction allowed for state and local taxes, including income, sales, and property taxes, is $10,000 per tax year for individuals or married couples filing jointly or $5,000 for married couples filing separately.
How To Claim the Property Tax Deduction
The property tax deduction is an itemized deduction, so the only way to claim is to choose to itemize your deductions instead of taking the standard deduction. In some cases, taking the standard deduction might make more sense for you if it translates to a higher deduction, so speaking to an accountant or professional tax preparer may be beneficial.
The property tax deduction is claimed on Form 1040 Schedule A, which is used for itemizing deductions. When using this form, you must enter the total amount of property taxes paid, the county which determines the tax rate, and the property number, which you can find on your property tax bill or assessment notice.
If you don’t pay property taxes directly and your payments instead go through an escrow account, you’ll receive Form 1098 from your lender, showing you the amount of deductible interest paid for the year and the total amount of property tax made on your behalf.
Property Tax Deduction: Best Practices
The property tax deduction can help reduce your taxable income, thereby reducing your tax liability for that year. Don’t forget to take these deductions because they can save you money and help you increase your tax refund. Here are some property tax deduction tips to help you get started:
Understand the Eligibility Criteria
Individuals are only eligible for the property tax deduction if they itemize their deductions on their tax returns. In addition, you should check whether the property qualifies for the deduction. As a general rule, if you’re a homeowner, your property taxes for your house qualify for the property tax deduction.
Determine if Itemizing Is Beneficial
Itemizing your deductions isn’t always a good idea. Many people save more money by taking the standard deduction. You should assess whether itemizing deductions would be more advantageous than taking the standard deduction.
It’s important to keep in mind that reducing your taxable income too much may impact your eligibility for a loan. Mortgage underwriters tend to use tax returns to determine a borrower’s ability to repay the loan, so if you take too many deductions, your income might not qualify you for some mortgage loans.
Of course, if your tax returns don’t accurately reflect your income, there are other mortgage programs you can use when you need to purchase property again. These low-doc loans allow you to qualify for a mortgage without tax returns, pay stubs, or W-2s. Learn more about what underwriters look for on tax returns.
Usually, the only reason to take the itemized deduction is when your itemized deductions add up to more than the standard deduction. You can calculate your potential itemized deductions, including property taxes, mortgage interest, and other eligible expenses, to determine which option provides the most tax savings.
File Your Tax Return on Time
You should always file your taxes on time to avoid any penalties or interest charges that can increase your tax liability. If you forget to file your taxes by the deadline, file them as soon as possible or try to file them early to prevent this from happening.
Keep Organized Records
You’ll receive your property tax bill twice a year in the mail, or your lender may make payments on your behalf through an escrow account. In any case, you should keep organized records of property tax statements, bills, and payment receipts for ease of filing.
If, for some reason, you haven’t kept your property tax bills, you can check your bank statements to determine the total amount you paid in property taxes. However, you’ll still need crucial information contained on your assessment, so you may have to contact your local tax assessor’s office.
Your lender will send you a form around tax season of every year to help you keep organized records of all payments made on your behalf.
In addition, you should keep copies of your filed tax returns and all supporting documents for a minimum of three years in case of future audits.
Consult With a Tax Professional
If you have a complex tax situation or are unsure about claiming property tax deductions, it’s advisable to seek guidance from a tax professional or accountant. These individuals can help you determine whether you should choose the standard or itemized deduction and help you find even more savings opportunities you might not know about.
While being a homeowner comes with its fair share of financial responsibilities, it’s one of the best investments you can make. Property tax deductions can offset some of the costs of homeownership, but finding the right mortgage loan for your unique situation is crucial.
The right mortgage loan can help you save throughout the life of your loan. Talk to a Griffin Funding mortgage specialist today. We’re mortgage experts specializing in many different types of home loan programs, from conventional to non-QM loans like bank statement loans and investment property loans.
We can help you determine which type of loan is right for you and help you understand property taxes and other potential real estate deductions you may be able to claim during tax season.
Frequently Asked Questions
Can I deduct property taxes on a second home or vacation property?
Can I deduct property taxes on investment properties or real estate held for investment purposes?
Can I deduct property taxes if I pay them through an escrow account?
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