How the Property Tax Deduction Works
If you own real estate, you almost always have to pay property taxes. Local or county authorities collect these taxes and use them for things such as public projects, infrastructure upkeep, public schools, libraries, and community services.
In most states, you also pay property tax on items such as vehicles and boats. You usually pay these fees by purchasing license plates or annual license tabs.
For real estate, property taxes depend on the assessed value of your land and the building or other structures on your land.
If you own real estate, you cannot avoid property taxes. However, these taxes can lead to deductions on your tax returns. If you follow the correct procedures and use the right forms, you may subtract your property taxes from income and, potentially, lower your overall tax bill or even qualify for a refund.
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What Is Property Tax Deduction?
A property tax deduction is the amount of property tax that the IRS allows you to deduct on your tax return.
Property tax is one of the state and local tax (SALT) deductions. Other deductions in this category involve state and local income and sales taxes.
There are specific rules to deducting your property taxes on your tax returns. Most importantly, you need to itemize deductions if you plan to claim the property tax deduction. You itemize by filling out a Schedule A form and attaching it to your main 1040 income tax document.
If you take the standard deduction offered by the IRS, you cannot claim a property tax deduction. Almost all special deductions like this one require that you fill out a Schedule A form.
Often, you pay property taxes through an escrow account when you pay your mortgage. At the end of the fiscal year, you get a statement that shows how much property tax you paid. This amount is what you use for the deduction.
What Kinds of Property Can You Deduct?
Most taxpayers use the property tax deduction for their primary residence. If you live in and own a home, townhome, condo, co-op apartment, or other residential structure, you can claim a property tax deduction. You cannot claim this deduction if you rent your home or if you use your property for commercial purposes.
You can also claim this deduction for other types of real estate.
- A vacation home or other second property;
- Undeveloped land;
Some types of property do not qualify. These include:
- Property that you own outside the United States;
- Business property or a property that you lease to someone else;
- Property taxes that you pay on a property you do not legally own. For example, if you assist a family member in paying their property taxes, you cannot claim this expense as a deduction because you are not the legal owner of the property.
You also cannot claim homeowners association fees or fees for services such as utilities and garbage collection.
There is a $10,000 limit on the property tax deduction. This limit is for people who are married, filing jointly. For those filing separately, the deduction limit is $5,000.
Understanding Escrow Accounts
You should also be aware that this deduction only covers the taxes you have already paid to the local property tax authority. Many homeowners pay their taxes into an escrow account that their mortgage provider operates.
The mortgage provider then pays the taxes to the local tax authority. Legally, the taxes get paid when the mortgage provider sends the money to the tax collector in your municipality or county. Also, the escrow is only an estimate, so you may have to pay more at the end of the year. If you overpaid, however, you get a refund.
Property Tax Deduction Limit
Until the Tax Cuts and Jobs Act of 2017, you could deduct property taxes without limit. After the new changes, however, property tax deductions got capped at $10,000, or $5,000 for couples who are married but filing separately. Again, these deductions are for real estate for personal use as a residence or vacation home. Commercial and rental properties do not qualify.
If you purchased or sold a home during the fiscal year, you are responsible for the property taxes for the time that you owned the house. If you owned the home for six months and then sold it, you have to pay six months of property tax, and you can only claim those six months for your deduction.
How to Claim a Property Tax Deduction
To claim your property tax deductions, you need either tax records and receipts for tax payments or Form 1098, the Mortgage Interest Statement. If you pay taxes through an escrow account, your mortgage provider will send you a 1098. You can use the information on this form for both property tax and mortgage interest deductions.
You can only claim a property tax deduction if you itemize your deductions. To claim the property tax (and mortgage interest) deductions, you enter both property tax and interest information from your 1098 on the Schedule A. If you do not have a 1098, you need to calculate your tax payments using tax records and receipts.
On the current Schedule A form, you enter your property tax information from your 1098 on Line 5b. Other personal property tax deductions, such as the taxes you paid on your vehicle, go on Line 5c.
You need to attach Form 1098 and any other supporting evidence to your tax return.
Property Tax Deduction Form
Form 1098 is a tax document that you get from your mortgage provider. It is also known as the Mortgage Interest Statement. It shows how much interest you paid on your mortgage during the fiscal year. You can also claim a deduction for your mortgage interest while claiming the property tax deduction.
Form 1098 tells you how much property tax the mortgage company paid to your local tax authorities on your behalf. You need to attach 1098 to your itemized deduction form, which is known as Schedule A.
If you do not get this form, you can use tax records from your county and municipality along with receipts that show your property tax payments.
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