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Property Tax Deduction: Can You Write Off Real Estate Tax?

5-Minute Read
Published on December 22, 2020
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There are many financial benefits that come with owning a house. You can build equity in your home – the difference between what you owe on your home loan and how much your home is worth – as you pay down your mortgage or as the value of your home increase. If your home’s value increases while you own it, you might earn a solid profit when you sell. You can even deduct the interest you pay on your mortgage loan each year on your income taxes.

But there’s another valuable financial benefit: You can also deduct the property taxes you pay on your home each year. You will have to follow some rules, though, and you can only write off your property taxes if you itemize your deductions and don’t take the standard deduction each year.

Here’s a look at how property tax deductions work and some questions you should consider when debating whether deducting real estate taxes makes financial sense for you.

Can You Deduct Property Taxes?

You are allowed to deduct your property taxes each year. The challenge now, though, is that you might not be able to deduct the total amount of property taxes you pay. That’s because of changes made by the Tax Cuts and Jobs Act, which was passed late in 2017. You can now deduct a total of $10,000 in state and local property taxes if you’re married and filing jointly and $5,000 if you’re single or married and filing separately.

This figure includes not only your home’s property tax, but also real estate taxes and other taxes assessed on other personal property such as cars and boats. It also includes state and local income taxes or state and local sales taxes.

If you paid $7,000 in property taxes in 2020 and $5,000 in state and local income taxes, you can only deduct $10,000 on your 2020 income taxes, not the $12,000 you actually spent.

You’ll also have to determine if it makes financial sense to deduct property taxes. The Tax Cuts and Jobs Act also increased the standard deductions that homeowners can take. For the 2020 tax year, the standard deduction for single taxpayers and married taxpayers filing separately is $12,400. For married taxpayers filing jointly, the standard deduction is $24,800.

If you decide to claim the standard deduction, you can’t also deduct your property taxes. This might make financial sense: If your standard deduction would be higher than any savings you could gain by itemizing your taxes, it makes more sense to claim that standard deduction. If you’d save more by itemizing and claiming your property tax deduction, you should itemize and not claim the standard deduction.

Property taxes can be confusing. Depending on your age, you might qualify for property tax exemptions, meaning that you either pay lower or no property taxes, which could impact your decision to deduct these taxes.

You might also not think of property taxes much throughout the year if, like many homeowners, your taxes and homeowners insurance are paid through escrow accounts you set up with your mortgage lenders.

Under these escrow arrangements, you pay extra with each mortgage payment. Your lender deposits these extra dollars in an escrow account. When your property taxes and homeowners insurance bills are due, your lender uses the funds in this account to pay them on your behalf. In this way, property taxes affect your mortgage payments, making them higher than they would be if you didn’t escrow your taxes and insurance. Escrow arrangements, though, do eliminate the risk of you missing your property tax payments, and even if you pay your property taxes through an escrow account, you can still deduct them on your income taxes.

Even if you can deduct them, though, it’s important to consider the impact property taxes can have on your home purchase. The higher your property taxes, the more expensive it will be to own your home. Say your home comes with yearly estimated property taxes of $8,400. If you escrow your property taxes, that will add $700 to your monthly mortgage payment.

Property Tax Vs. Real Estate Tax

Property taxes and real estate taxes are the same, and both terms can be used interchangeably. However, there is a difference between real property tax and personal property tax.

Real Property Vs. Personal Property

The big difference between real and personal property taxes is that real property taxes are generally on immovable items, such as a home, the land on which it sits and any buildings, fences, sewers, drains or other improvements on that land.

Personal property taxes are those levied on all property that doesn't fit into the "real property" category. These taxes are on movable assets such as cars, boats, livestock and other items that you own.

Exceptions

You can't claim deductions for every kind of tax levied against your properties. For instance, you can't deduct the cost of any assessments levied against you for the building of streets, water systems, sewer systems and sidewalks in your community. You can't deduct the portion of your property tax bill that's allocated for services such as water or trash collection.

If you live in a building or community that charges homeowners association fees, you can't deduct them. And you can't deduct any payments you've made on loans that finance the addition of energy-saving improvements to your home.

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How To Claim Your Property Tax Deduction

If you plan on itemizing your taxes, here are the steps to follow to claim your property tax deduction.

Determine If You Want To Itemize

Remember, you can only claim your property tax deduction if you itemize your taxes. If you claim your standard deduction, you can’t also write off property taxes. You’ll need to determine, then, whether you’ll save more money on your taxes with the standard deduction or by itemizing.

Review Tax Records

Your local or county government will usually send your property tax bills two times a year. Refer to them to determine how much you paid in taxes for the year. You can only deduct your property taxes in the year you pay them. If you are filing your taxes for 2020, then, only deduct the amount of property taxes you paid in that year.

Double Check Your Escrow Account

If you make your property tax payments through an escrow account set up by your mortgage lender, it’s even easier to keep track of what you paid. Each year, your lender will send you a 1098 statement. This statement lists the amount of mortgage interest you pay during the year. But it also lists the property tax payments your lender has made on your behalf. You can find this number in Box 4 of your 1098 form.

Use Schedule A

You'll need to file a completed Schedule A with the IRS if you want to claim a property tax deduction. This form allows you to claim a host of deductions, everything from medical and dental expenses to mortgage interest.

You can also enter the state and local taxes you paid during the year on line 5a, your state and local real estate taxes on line 5b and your state and local personal property taxes on line 5c. You'd then add lines 5a through 5c to determine your property tax deduction.

Include Schedule 4 when you send your income taxes to the IRS.

Should You Write Off Real Estate Tax?

Writing off your real estate taxes could save you a significant amount of money on your taxes, depending on how much you pay in property tax, state and local taxes and personal property taxes each year. The key, though, is to determine whether you can save more money by itemizing your taxes instead of claiming the standard deduction. Because the standard deduction is now higher, fewer taxpayers will benefit from itemizing. But if you want to be sure, you’ll have to itemize your taxes first to determine if you’ll save more with the standard deduction.

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Call our Home Loans Experts at (800) 251-9080 to begin your mortgage application, or apply online to review your loan options.

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