Property Tax Deduction: Can You Write Off Real Estate Tax?
A valuable financial benefit to owning a house is that you can deduct the property taxes you pay on your home each year, although a 2017 change in the tax laws may have made that less attractive.
Let’s take a look at how property tax deductions work, as well as some important considerations when debating whether deducting real estate taxes makes financial sense for you.
What Is The Property Tax Deduction?
The property tax deduction is just one of the many tax benefits that homeowners in the U.S. have enjoyed over the years. The 2017 Tax Cuts and Jobs Act capped the amount of that deduction – the state and local taxes (SALT) deduction – at $10,000. The property tax deduction allows homeowners to deduct their local property, or real estate taxes, from their federal income taxes.
What Are Property Taxes?
Property taxes and real estate taxes are the same, and the terms can be used interchangeably.
State and local taxes are used to pay for services where you live. In particular, property taxes often fund school districts, garbage pick-up and all the other services that municipalities offer. Property taxes are assessed locally on the value of your home.
If your mortgage servicer maintains an escrow account – sometimes referred to as an impound account – on your behalf, you may not think much about property taxes, but they're being paid as part of your monthly mortgage payment. This account is also used to pay homeowners and mortgage insurance premiums, if applicable.
Are Property Taxes Deductible?
You're allowed to deduct your property taxes each year, but since the passage of the 2017 Tax Cuts and Jobs Act, it may or may not make sense to do so, depending on your situation.
The Cap On The Property Tax Deduction
First, the 2017 law put a cap on the amount of the property tax deduction. You can now deduct a total of $10,000 in state and local property taxes if you're single, a head of household or if you're married and filing jointly, and $5,000 if you're married and filing separately.
Higher Standard Deduction
The 2017 law also increased the amount of the standard deduction. With 2022 inflation-related increases, the standard deduction is up to $12,950 if you file as single or married, filing separately. Heads of households have a standard deduction of $19,400. Finally, if you're married filing jointly, your standard deduction is $25,900.
Standard Deduction Vs. Itemized Deductions: What's The Difference?
Aside from the SALT cap, as it's known, the biggest change to the property tax deduction caused by the 2017 tax law is that – because of the increase in the standard deduction – it may not make sense for many homeowners to itemize their deductions. Remember that you can elect to use either standard or itemized deductions, but not both.
What Is The Standard Deduction?
The standard deduction is the amount everyone gets to deduct from their taxes. You may be able to claim a higher standard deduction if you're blind, or age 65 or older. The IRS website has an interactive tax assistant that will tell you exactly how much your standard deduction is.
What Are Itemized Deductions?
You can always try to itemize your deductions to see if doing so gives you a bigger deduction than the standard deduction allows. Because of the SALT cap, it no longer makes sense for many homeowners to itemize their deductions.
For example, if you paid $7,000 in property taxes in 2021 and $5,000 in state and local income taxes, you can only deduct $10,000 on your 2021 income taxes, not the $12,000 you actually paid.
How Much Is The Standard Deduction In 2022?
For 2022, the standard deduction is $12,950 per individual taxpayer, $25,900 for married couples filing jointly and $19,400 for heads of households. The 2017 law requires that the deduction be revised each year to account for inflation.
How To Claim Your Real Estate Tax Deduction
If you decide to claim the standard deduction, you can't also itemize to deduct your property taxes. 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.
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're 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 tax 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 along with your Form 1040 with the IRS if you want to claim a property tax deduction. This form allows you to claim all of your deductions, from medical and dental expenses to mortgage interest.
You can also enter the state and local income or general sales taxes (one or the other) 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.
Property Tax Deduction FAQs
Here are some common questions and answers about the property tax deduction.
What's the difference between a tax deduction and a tax exemption?
Property tax exemptions are portions of a full tax amount that taxpayers don’t have to pay. Some state and local governments offer exemptions to reduce or forgo the amount of taxes paid by some residents, usually on the basis of age, disability or military service. There is also a homestead exemption in many areas.
To see if your municipality offers an exemption and whether you qualify, check your local government's website.
What is escrow and how does it pay for my property taxes?
Escrow is an account set up by your lender through which you can pay your property taxes and insurance premiums. Under these escrow arrangements, you pay extra with each mortgage payment, and 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, can reduce 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.
How do I find out what property taxes will be on the properties I'm considering?
The higher your property taxes, the more expensive it will be to own your home. For example, 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.
You can also ask home sellers what they're paying but understand that you'll probably pay more if your purchase price exceeds the current owner's assessed value. It also varies because you might qualify for different exemptions as well.
Even if you can deduct them, though, it's important to consider the impact property taxes have on home buying.
Are there exceptions to the property tax deduction?
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 (HOA) fees, you can't deduct them. And you also can't deduct any payments you've made on loans that finance the addition of energy-saving improvements to your home. Depending on your situation, there may be other deductions and credits available for these energy-saving home improvements.
The Bottom Line
The 2017 tax law modified many rules, but it still allows at least a partial property tax deduction. Whether it makes sense for you to take it depends on your individual situation, but many homeowners will find that the standard deduction more than makes up for the cap on the deduction.
If you don’t own a home yet but are considering it, get preapproved today with Rocket Mortgage® and see what rates and terms you can qualify for.