State and local property taxes are generally eligible to be deducted from the property owner’s federal income taxes. Deductible real estate taxes include any state, local, or foreign taxes that are levied for the general public welfare. They do not include taxes charged for home renovations or for services like trash collection.
As noted below, the Tax Cuts and Jobs Act (TCJA) capped the property tax deduction, along with other state and local taxes, starting with 2018 taxes. The law capped the deduction for state and local taxes, including property taxes, at $10,000 ($5,000 if married filing separately). Previously, there was no limit on the deduction.
Key Takeaways
- State and local governments assess property taxes annually, based on the value of a property.
- A property owner can claim a tax deduction on some or all of the taxes paid on that property, provided it is for personal use and the owner itemizes deductions on the federal tax return.
- Taxes paid on rental or commercial property—and on property not owned by the taxpayer—cannot be deducted.
- Starting in 2018, the deduction for state and local taxes, including property taxes, was capped at a total of $10,000 ($5,000 if married filing separately).
Understanding the Property Tax Deduction
The owner of a property must pay taxes, assessed annually by a state and/or local government, on the value of the property. A property owner can claim a tax deduction on some or all of the property taxes paid if they use the property for personal use and itemize deductions on their federal tax return.
The real estate taxes that can be deducted include taxes paid at closing when buying or selling a home and taxes paid to a county or town’s tax assessor on the assessed value of the real property. Real property, according to the Internal Revenue Service (IRS), may include a taxpayer’s main home, vacation home, land, or foreign property.
Special Considerations
Taxes paid on rental or commercial property—and on property not owned by the taxpayer—cannot be deducted. In addition, a homebuyer who pays the seller’s delinquent taxes from an earlier year at the time the sale was closed cannot deduct these tax payments on their tax return. This delinquent tax payment is, instead, treated as part of the cost of buying the home.
Also, a property owner’s tax bill includes miscellaneous items that are not allowed to be deducted for tax purposes. Some of these items include payments for improvements made to a local residential area, such as sidewalks, and fees for service delivery, such as trash collection. To understand what portion of a tax bill qualifies for the deduction, refer to Form 1098, which is reported by the bank or lender to the IRS and sent to the property owner.
How to Claim a Property Tax Deduction
To claim a property tax deduction, the tax must apply only to the value of the personal property owned and be charged on an annual basis, irrespective of when the government collects it from you. Therefore, if the state tax was only charged at the time the property was purchased, then it does not meet the IRS definition of a deductible personal property tax.
As stated earlier, property tax can only be deducted if the owner chooses to itemize deductions. It makes sense for a taxpayer to itemize deductions if the sum of all their eligible itemized expenses is greater than the standard deduction allowed in a given tax year.
Pros and Cons of the Property Tax Deduction
From time to time, there is talk of eliminating the property tax deduction. One of the arguments for doing so is that the deduction—along with the federal mortgage interest deduction—discriminates against renters and encourages people to take on more debt. Proponents of retaining the property tax deduction say that it promotes homeownership.
The Tax Cuts and Jobs Act (TCJA) of 2017 capped the deduction for state and local taxes, including property taxes, at a total of $10,000 ($5,000 if married filing separately), starting in 2018. Previously, there was no limit on the deduction.
In addition, under the new law homeowners who deduct mortgage interest are limited to the amount they pay on $750,000 worth of debt, down from $1 million. Interest on homes bought before Dec. 16, 2017, is guaranteed as a special exception at the previous rate.
Because the standard deduction doubled in 2018, predictions are that fewer homeowners will itemize their deductions. Thus, fewer property owners will claim the property tax deduction.
The standard deduction is revised every year. For tax year 2022, the standard deduction for couples is $25,900 and the deduction for single filers is $12,950. For tax year 2023, the standard deduction for single filers is $13,850 and $27,700 for married couples filing jointly. Heads of household can deduct $20,800.
Related Terms: tax deduction, standard deduction, mortgage interest deduction, federal income tax, state and local taxes.
References
- Internal Revenue Service. “Topic No. 503 Deductible Taxes”.
- Internal Revenue Service. “Tax Reform Brought Significant Changes to Itemized Deductions”.
- Internal Revenue Service. “Publication 530 (2021), Tax Information for Homeowners”.
- Internal Revenue Service. “Know the Tax Facts About Renting Out Residential Property”.
- Internal Revenue Service. “Publication 551 (12/2022), Basis of Assets”.
- Internal Revenue Service. “About Form 1098, Mortgage Interest Statement”.
- Internal Revenue Service. “Publication 936 (2021), Home Mortgage Interest Deduction”.
- Internal Revenue Service. “Be Tax Ready – Understanding Tax Reform Changes Affecting Individuals and Families”.
- Internal Revenue Service. “IRS Provides Tax Inflation Adjustments for Tax Year 2022”.
- Internal Revenue Service. “IRS Provides Tax Inflation Adjustment for Tax Year 2023”.
