Everyone who owns real estate pays property taxes. Depending on where you live, they can be easy to manage or a huge financial burden. Either way, your real estate taxes may be deductible -- and that can save you money.
What are real estate taxes?
If you're a homeowner or a real estate investor, you're probably familiar with real estate taxes. Local governments collect these taxes to help fund projects and services that benefit the entire community, such as schools, libraries, emergency services, and road construction.Real estate taxes -- or property taxes, as they're commonly called -- are based on the assessed value of your land and any buildings on it. The assessed value is multiplied by the local tax rate to determine your tax bill. For example, if your home has an assessed value of $250,000 and the tax rate is 1%, your property tax bill will be $2,500.You pay the tax to your local tax assessor each year or it gets rolled into your monthly mortgage payments. Either way, you continue to pay the tax as long as you own the property -- even if you pay off your mortgage or stop using the home as your primary residence.
Are real estate taxes deductible?
Yes. You can deduct your real estate taxes on your federal income tax return. But limits apply and you have to itemize to take the deduction. The Tax Cuts and Jobs Act limits the amount of property taxes you can deduct. For 2019, the IRS says you can deduct up to $10,000 ($5,000 if you're married filing separately) of the following costs:
- Property taxes, including real estate taxes and personal property taxes.
- State and local income taxes or state and local sales taxes (you can't claim both).
Keep in mind that the $10,000 limit is for both of these types of deductions combined. These are collectively known as the state and local taxes (SALT) deduction. In some cases, it's hard to predict if you'll benefit more from the income tax or sales tax deduction, so run the numbers if you're not sure.
State and local income tax or sales tax
If you itemize deductions, you can deduct state and local income taxes or state and local sales taxes -- but not both. If you live in a state with no income tax, the sales tax deduction makes the most sense. Of course, if you pay income tax in your state, that deduction will probably save you more money than the sales tax deduction.
If you go the sales tax route, you can add up your actual receipts. Or, to make things easier, you can use the sales tax tables found in Schedule A or a sales tax deduction calculator to estimate what you paid.
What can I deduct?
You can deduct up to $10,000 ($5,000 if married filing separately) of combined property taxes and either income taxes or sales taxes (not both). Here's a rundown:
|SALT Deduction Type||What It Is||How to Find It|
|Property taxes||Real estate taxes you paid on property you owned that wasn't for a business, including
• primary residences,
• vacation homes,
• co-op apartments,
• and land.
|• Check Box 10 on IRS Form 1098 from your mortgage company.
• Review your tax bills and mortgage account statements.
• Visit your local tax assessor's website or office.
|Personal property taxes||Non-real estate property taxes based on the item's value (usually a car, RV, or boat).||• Review your receipts.
• Check your credit card and bank statements for taxable purchases.
• Contact the dealership where you made the purchase.
|State and local income taxes||State and local income taxes that were withheld from your salary during the tax year.||• Look in the "State" and "Local" boxes of Forms W-2, 1099-G, 1099-R, and 1099-MISC.|
|Prior year state and local income tax payments||State and local income taxes you paid during the current tax year for a previous tax year. Don't include penalties and interest.||• Review your tax receipts and records.
• Check with your tax accountant or CPA.
|State and local estimated tax payments||State and local estimated tax payments made during the current tax year, including any part of a prior year's refund credited to your current year's state or local income taxes.||• Review your tax receipts and records.
• Check with your tax accountant or CPA.
|State and local sales taxes||State and local sales taxes you paid for items like food, clothing, medical supplies, cars, and boats.||• Keep track of your actual expenses
• .Use the optional sales tax tables found at the end of the Schedule A Instructions.
• Use the IRS's sales tax deduction calculator.
What can't I deduct?
Of course, there are many items you can't deduct as part of the SALT deduction, including the following:
- Taxes for rental or business property.
- Taxes on foreign property.
- Property taxes your lender hasn't submitted to the county yet (look at Form 1098 or ask your lender if you're not sure).
- Federal income taxes (remember, the SALT deduction is for state and local taxes).
- Transfer taxes on the sale of a house.
- Homeowners association assessments.
- Property taxes you paid for someone else or for a property you don't own.
- Charges that show up on your property tax bill for non-tax items like trash collection, assessments for local benefits (such as building a sidewalk in front of your house), and fees to satisfy a fine you owe.
- Social Security, Medicare, federal unemployment (FUTA), and railroad retirement (RRTA) taxes.
- Customs duties.
- Federal estate and gift taxes.
- Some state and local taxes, including taxes on gasoline, car inspection fees, assessments for sidewalks or other improvements to your property, and license fees (e.g., marriage, driver's, and pet licenses).
- Taxes you haven't paid yet.
When you file your taxes, you can take either the standard deduction or you can itemize. The Tax Cuts and Jobs Act nearly doubled the standard deduction. Because of that, it's estimated that about 95% of households will benefit from the standard deduction instead of itemizing.
The standard deductions depend on your filing status. Here are the 2019 standard deductions:
|Filing Status||2019 Standard Deduction|
|Married filing jointly||$24,400|
|Married filing separately||$12,200|
|Head of household||$18,350|
Unless your itemized deductions are greater than the standard deduction for your filing status, it's better to take the standard deduction. However, you may not know which deduction to take until you crunch the numbers.
If you want to deduct your real estate taxes, you must itemize. In other words, you can't take the standard deduction and deduct your property taxes. For 2019, you can deduct up to $10,000 ($5,000 for married filing separately) of combined property, income, and sales taxes.
While the Tax Cuts and Job Act nearly doubled the standard deduction, it also eliminated many itemizable deductions. Still, there are several deductions that might make itemizing come out ahead of the standard deduction, including:
- mortgage interest,
- medical and dental expenses,
- charitable contributions, and
- casualty and theft losses.
Let's take a look at each of those individually.
The deduction applies to mortgages you use to buy, build, or substantially improve a home (this is called acquisition debt).
The deduction isn't as valuable as it was before the Tax Cuts and Jobs Act. But it might still make itemizing worthwhile. The deduction limit depends on when you got the mortgage:
- After Dec. 15, 2017: You can deduct the interest you pay on the first $750,000 ($375,000 if married filing separately) of qualified mortgage debt on a first and/or second home.
- Before Dec. 16, 2017: You can deduct the interest on the first $1 million ($500,000 if married filing separately) of mortgage debt.
Medical and dental expenses
For 2019, you can deduct unreimbursed medical and dental expenses that exceed 10% of your adjusted gross income. In general, you're allowed to deduct the following:
- Preventive care (if you have an Affordable Care Act-compliant plan, preventive care is covered at 100%).
- Medical treatments and surgeries.
- Dental and vision care.
- Mental healthcare.
- Prescription medications.
- Medical appliances such as glasses, contacts, hearing aids, and dentures.
- Travel expenses for getting to and from your appointments.
However, there are certain expenses you can't deduct:
- Any expense that you've been reimbursed for (for example, if your insurance or employer covers the costs).
- Cosmetic procedures.
- Non-prescription drugs (except insulin).
- General health products and services, such as health club memberships, vitamins, and toothpaste.
Let's look at an example. Say your adjusted gross income (AGI) is $50,000 and you have $8,000 of unreimbursed medical expenses.
Multiply your AGI by 10% to find the part of your medical expenses that aren’t deductible. In this example, that's the first $5,000 (10% of $50,000). You can deduct anything above that. So you'd be able to deduct $3,000 of medical expenses.
If you itemize, you can deduct contributions or gifts you make "to organizations that are religious, charitable, educational, scientific, or literary in purpose." Also, you can deduct the money you gave to organizations that work to prevent cruelty to children or animals.
For 2019, you can generally deduct up to 60% of your adjusted gross income in donations. If you donate assets (stocks, for example), they can have a fair market value of up to 30% of your AGI.
Your contributions can be in cash, property, or out-of-pocket expenses you incur to volunteer for an eligible organization. For example, if you drove to and from a non-profit to help with an event, you can deduct the actual cost of gas or $0.14 per mile (your choice). You can also deduct the cost of parking and tolls. You can't deduct the value of your time or services.
Before you claim a deduction, make sure the organization is a 501(c)(3) public charity or private foundation. Also, be sure you can substantiate the value of the deduction, whether it's with a tax receipt from the charity or a qualified appraisal (for non-cash donations).
Use Schedule A to claim the deduction, and attach Form 8283 if you made any gift over $500.
Casualty and theft losses
In some situations, you can claim a deduction for damage and losses. But you have to itemize to do so.
For 2019, you can only deduct casualty and theft losses you sustain as the result of a federally declared disaster. The president can declare a disaster in a variety of situations, including:
- high water,
- tidal waves,
- volcanic eruptions, and
- wind-driven water.
In general, you can deduct losses that exceed 10% of your adjusted gross income. Calculate any casualty and theft losses on Form 4684, and then enter the amount on Schedule A.
How do I claim the property tax deduction?
Because the standard deduction is so high, you'll probably need other deductions beyond real estate taxes to make itemizing worthwhile.
If you decide to take the property tax deduction, here's how you do it:
You claim the property tax deduction when you file your federal income tax return. You'll use Schedule A to figure the deduction.
It helps to get organized before you start to work on your taxes -- whether you do them yourself or you get help. Begin by finding your tax records for the real estate taxes you paid as well as the receipts for any cars, RVs, or boats you bought during the year. Next, gather your W-2s and 1099s to determine how much you paid in state and local income taxes.
If you plan to claim a deduction for sales taxes instead of income taxes, gather your receipts to calculate actual expenses. Otherwise, use the optional sales tax tables found at the end of Schedule A or the IRS's sales tax deduction calculator to estimate what you paid.
Take a close look at your records to make sure you're not trying to deduct something the IRS doesn't allow (such as the trash collection part of your property tax bill).
Once you've organized your tax records and receipts, think about any other deductions you may be able to take, including the ones for mortgage interest, medical and dental expenses, charitable contributions, and casualty and theft losses.
Fill out Schedule A (and the other required forms, depending on the deductions you take) to calculate your total deductions. If your total itemized deductions are higher than the standard deduction, enter that amount on Form 1040. Otherwise, it's better to take the standard deduction.
If you work with a tax accountant, they should run both scenarios to make sure you get the best tax treatment possible. This can be well worth the money you pay.
Can I deduct partial-year property taxes?
If you bought or sold a house this year -- and owned it for just part of the year -- you would prorate the real estate taxes and deductions.
For example, say you sold your house on March 31: You would pay one-quarter of the taxes (this will probably be handled at the closing table) and deduct one-quarter of the property taxes on the house. So if the tax bill for the year were $1,000, you would pay $250 in taxes and you'd be able to deduct that same amount.
But what if you moved out on say, June 12, instead of exactly one-quarter of the way into the year? It's the same idea as the above example. Determine the percentage of the year that you owned the property, and then multiply that by the annual tax bill.
You can use an app or an online calculator to figure out how many days into the year a date is. June 12, for example, falls on day 163. Divide that by 365 (the number of days in a year) to find the percentage of the year you owned the home. In this case, it would be 44.6575%. If the tax bill is $1,000, the prorated property taxes for the year would be $446.58.
Are real estate transfer taxes deductible?
No, they aren’t. If you buy or sell real estate, you'll pay a transfer tax (also known as a deed tax, mortgage registry tax, or stamp tax). The tax is levied as a percentage of the sale price or appraised value of the property.
In general, the tax is a set rate for every $500 of property value. For example, the transfer tax might be $5.00 for every $500. On a $200,000 house, that comes out to $2,000.
Depending on where you live, you could be on the hook for taxes at the city, county, and state level. And if you inherited -- or were otherwise gifted -- property, you may owe federal transfer tax as well.
As part of the negotiation process, the buyer and seller work out who pays the transfer tax. In some real estate markets, it might be tradition for one party or another to cover the tax. And in a few markets, the buyer and seller each pay their own transfer taxes.
Transfer taxes can add up, especially if you have to pay them to more than just the state. And you won't get a tax break for paying them. Whether you're the buyer or the seller, transfer taxes aren't deductible.
Still, the IRS allows you to include them in the cost basis of the property if you paid them as the buyer. And if you're the seller and paid them, you can include them as a sale expense, which can help lower your capital gain.
Of course, other expenses can also help reduce your capital gain, including:
- advertising and appraisal fees,
- broker commissions,
- document preparation fees,
- escrow and closing costs,
- home improvements,
- points paid by the seller,
- settlement fees,
- title search fees.
When in doubt, reach out
The Tax Cuts and Jobs Act almost doubled the standard deduction for every filing status. That will be a better option for most taxpayers.
However, itemizing can make sense if you have the right combination of deductions, including the one for property taxes. Here's a rundown of the most common itemizable deductions, along with their limits:
|Property and state and local income or sales taxes||Up to $10,000 ($5,000 married filing separately)|
|Mortgage interest||The interest you pay on the first $750,000 of mortgage debt ($375,000 married filing separately) if you took out a mortgage after Dec. 15, 2017|
|Medical and dental expenses||Qualified medical expenses that exceed 10% of your adjusted gross income|
|Charitable contributions||Donations can equal 60% of your adjusted gross income or 30% if you donate assets (e.g., stocks)|
|Casualty and theft losses||In general, you can deduct losses that exceed 10% of your adjusted gross income, but they must be the result of a federally declared disaster|
Tax laws are complicated, and they change periodically. It's always a good idea to reach out to a trusted tax professional or CPA. They can work with you to ensure you’re getting the most favorable tax treatment possible, no matter what deductions you claim.