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Deducting Your Property Taxes

If you're a homeowner, you almost certainly have to pay property taxes. These are local taxes based upon the assessed value of your home. The more your home is worth, the more you'll have to pay. Fortunately, property taxes are deductible from your federal income taxes. However, the Tax Cuts and Jobs Act imposed new limitations on this deduction.

Deduction the Year You Buy Your Property

For federal income tax purposes, the seller is treated as paying the property taxes up to, but not including, the date of sale. You (the buyer) are treated as paying the taxes beginning with the date of sale. This applies regardless of the lien dates under local law. Generally, this information is included on the settlement statement you get at closing. You and the seller each are considered to have paid your own share of the taxes, even if one or the other paid the entire amount. You each can deduct your own share, if you itemize deductions, for the year the property is sold.

Charges That Are Not Deductible

Not all charges imposed on homeowners by the government are deductible. The following items are not deductible as property taxes.

Charges for services

According to the IRS, an itemized charge for services to specific property or people is not a tax, even if the charge is paid to the taxing authority. You cannot deduct the charge if it is:

• a unit fee for the delivery of a service (such as a $5 fee charged for every 1,000 gallons of water you use)
• a periodic charge for a residential service (such as a $240 annual fee charged for trash collection), or
• a flat fee charged for a single service provided by your local government (such as a $30 charge for mowing your lawn because it had grown higher than permitted under a local ordinance).

You must look at your property tax bill to determine if any nondeductible itemized charges are included in the bill. If your taxing authority (or lender) does not furnish you a copy of your real estate tax bill, ask for it. Contact the taxing authority if you need additional information about a specific charge on your bill.

Assessments for local benefits

You also cannot deduct amounts you pay for local benefits that tend to increase the value of your property. Local benefits include the construction of streets, sidewalks, or water and sewer systems. You must add these amounts to the basis of your property; that is, the total value of the property for tax purposes. Increasing your basis this way will reduce any taxable profit when you sell the property.

However, there is an exception to this rule: Any part of a special assessment you pay that is for maintenance, repairs, or an interest charge for a local benefit for your property is deductible. You may claim this deduction only if the taxing authority sends you an itemized tax bill separately listing the amounts you must pay for construction, interest, and maintenance.

Example: A city assessed a front foot benefit charge against property that was benefited by construction of a water system. The city’s tax bill itemized the charge, showing how much was assessed for construction of the water system, interest, and maintenance costs. Taxpayers were allowed to deduct the amounts for interest and maintenance.

$10,000 Annual Property Tax Deduction Limit

Before 2018, you could deduct the full amount of property tax you paid on your home without any limit. This enabled homeowners with expensive homes and large property tax bills to take substantial deductions. However, the Tax Cuts and Jobs Act imposed a $10,000 annual limit on the property tax deduction for 2018 through 2025. The $10,000 annual limit applies to the total amount you pay for:

• state and local property taxes
• state and local personal property taxes
• state and local income taxes, and
• state and local sales taxes deducted instead of state income taxes.

Example: George owns a $1 million home on which he pays $12,000 in property tax each year. He also paid $10,000 in state income tax. He may deduct only $10,000 of these amounts each year during 2018 through 2025. The remaining $12,000 is not deductible.

You Must Itemize to Deduct Your Property Taxes

Property tax is deducted as an itemized personal deduction on IRS Schedule A. This means you may deduct your property taxes only if you itemize your personal deductions instead of taking the standard deduction. The Tax Cuts and Jobs Act roughly doubled the standard deduction to $12,000 for single taxpayers and $24,000 for married taxpayers who file jointly (as almost all do).

You should itemize your deductions on Schedule A only if all your itemized deductions exceed the $12,000 (single) or $24,000 (marrieds) threshold. With the standard deduction so high, far fewer taxpayers will be able to itemize their deductions than in the past. In fact, millions of homeowners who have property tax bills will be unable to deduct them.

Example: Stan and Sandra are married homeowners who pay $3,000 in property tax each year and $2,000 in state income tax. Their total itemized deductions amount to $8,000 so they take the $24,00 standard deduction instead of itemizing. They get no deduction for their property taxes.

However, many homeowners who can't deduct their property taxes will still be better off because they benefit from the high standard deduction and other tax reductions brought about by the Tax Cuts and Jobs Act.