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What is the property tax deduction?

Exterior of two story house in Autumn
Rebecca Nelson/Getty Images
Exterior of two story house in Autumn
Rebecca Nelson/Getty Images

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Owning a home comes with certain tax advantages. One of those advantages is the ability to deduct real estate taxes on your federal tax return. In addition to real estate taxes, you may also be able to deduct taxes on certain types of personal property, including boats, cars or recreational vehicles.

While 2017 legislation changed the rules about property tax deductions, taking this deduction instead of the standard deduction could still make sense in some instances.

Here’s what to know about the property tax deduction, how it works, and how to claim it.

What is a property tax deduction?

Counties, cities, and states levy property taxes on various kinds of property. Property may include owned real estate, recreational vehicles, boats, land, vacation homes and more.

“Homeowners can deduct the state and local taxes that have been paid on their property from their federal income taxes,” says Shmuel Shayowitz

president and chief lending officer at Approved Funding, “This includes annual property taxes as well as the taxes that may have been paid at closing during the sale or purchase of the property.”

But homebuyers who pay off delinquent tax liens from earlier years at closing are not allowed to deduct them from federal taxes. Payments such as these should be treated as part of the cost of purchasing a property rather than a property tax deduction.

If you pay property taxes by depositing money into an escrow account each month as part of your mortgage payment, the entire payment shouldn’t be treated as a property tax deduction. Only the amount that the bank reports to the Internal Revenue Service (IRS) is eligible for the deduction. That is because the amount you pay to an escrow account is adjusted each year to be as close as possible to the exact amount due, but it’s never exactly the same amount.

What sort of property is eligible for the deduction?

Eligible property tax deductions may include:

  • Primary residence
  • Investment property
  • Vacation home
  • Land
  • Boat
  • Recreational vehicle
  • Car

What sort of property isn’t eligible?

Per IRS regulations, you cannot deduct taxes from the following:

  • Taxes on non-owned property
  • Transfer taxes on a home sale
  • Service fees for water, sewer, and trash pickup
  • Homeowners association fees

How does the property tax deduction work?

Each state, county and municipality has its own list of what kind of personal property is taxable, and specifies how taxpayers should determine an item’s taxable value. Here we’ll focus on real estate taxes and how they are calculated. However, it’s important to note that how homes are assessed and how taxes are calculated may vary based on where you live.

Real estate taxes are levied on both your home and the land it sits on. A tax assessor determines your property’s value, which is then multiplied by your municipality’s tax rate to determine your total tax bill. So if your home’s assessed value is $300,000, and your local tax rate is 1.05%, your tax bill would be $3,150.

How big a property tax deduction can you take?

Before the 2018 tax year, there was no cap on the property tax deduction, but in the case of large deductions, the Alternative Minimum Tax may have applied. But after the passage of the 2017 Tax Cuts and Jobs Act, this deduction was capped at $10,000 (or $5,000 if married filing separately.)

So it likely only makes sense to itemize and deduct your property tax if your total deductions exceed the 2022 standard deduction, which is $25,900 for joint filers or surviving spouses, $12,950 for single filers or married filing separately, or $19,400 for heads of household. Consider speaking with a tax expert if you have questions about whether to itemize or take the standard deduction.

How to claim the property tax deduction

If you decide to claim the property tax deduction, you can do so by completing a Schedule A form and submitting it to the IRS with your 1040 income tax form. The Schedule A is the form taxpayers use to calculate itemized deductions.

Keep in mind if you opt to itemize deductions, your taxes will likely take longer to complete. Still, the extra time could be worth it if you end up with a lower tax bill or a larger return.