How Much of Your Property Taxes Can You Deduct?

Property tax deductions can provide significant savings when filing your taxes, but understanding how they work and what qualifies can be complex. Each year, during tax season, homeowners and property investors across the United States wonder: Is property tax deductible? 

In this comprehensive guide, we’ll discuss the key aspects of property tax deductions, offering insights into how much you can deduct, the types of taxes that qualify, and how federal and state regulations impact these deductions. We'll cover everything from IRS rules to common mistakes to avoid when filing. 

Whether you're a homeowner or a tax preparer, this article will help maximize the tax benefits of a property tax deduction.

What Are Property Tax Deductions? Understanding How They Work

Homeowners itemizing their federal tax returns may deduct property taxes paid on their main residence and on any other types of real property they own, thus reducing taxable income. This includes property taxes paid starting from the date the property was purchased. That official sale date can be found in the property’s closing documents.

Generally, taxpayers can deduct property taxes for their primary home, a co-op apartment, a vacation home, and land. Taxpayers can even deduct property taxes for property outside the United States and personal property taxes (those paid when registering a boat or a vehicle). IRS Publication 530 includes special rules and exceptions regarding deductible property taxes.

How Much of Your Property Taxes Are Tax Deductible?

Although state and local taxes, including property taxes and either income or sales taxes, are deductible, the state and local tax deduction (SALT) is capped at $10,000 annually ($5,000 for taxpayers who are married and filing separately). Your property taxes must be based on the assessed value of your property and charged uniformly to all properties within your jurisdiction to qualify. Even when listed on your property tax bill, fees for water, trash collection, and other services are not tax deductible. The SALT deduction can reduce federal tax liability and provide significant relief, particularly in high-tax states.

Are Property Taxes Deductible on Federal Income Tax?

Although the federal government allows taxpayers who itemize to deduct property taxes, there is one catch. As of 2018, property tax deductions are limited by the SALT cap, which means that property owners may only claim up to $10,000 ($5,000 for those who are married and filing separately).

This state and local tax category includes:

• Real property taxes
• Income taxes OR sales taxes (for states without an income tax)
• Personal property taxes (such as those associated with registering a vehicle)

For example, a taxpayer who paid $5,000 in property taxes on their home, $8,000 in state income taxes, and $125 in personal property taxes associated with registering a vehicle will have a total state and local tax burden of $13,120. However, the IRS will only allow that taxpayer to deduct $10,000 through their Schedule A filing. Not only is the remaining $3,125 not deductible, but it cannot be carried forward into the next tax year. 

IRS Rules on Property Tax Deductions

Property taxes are only deductible if you itemize deductions on Schedule A (Form 1040). If you take the standard deduction, you may not claim a separate property tax deduction. The total SALT deduction is capped at 10,000 and includes property taxes, as well as state and local income or sales taxes.

The following rules and conditions must be met if you want to deduct property taxes on your federal tax return:

• The property must be in the form of real estate
• You must be the legal owner of the property
• The property taxes must have been levied on you and were actually paid during the tax year.

Only certain property taxes qualify, including state, local, and foreign real property taxes based on the property's assessed value and levied for the general public welfare. Special assessments related to local benefits (such as water and sewer lines) are not deductible but may be added to the property’s cost basis. 

To claim your deduction, you will need the following documentation:

• Property tax bills from your local taxing authority.
• Proof of payment in the form of canceled checks, bank or credit card statements, escrow statements, or mortgage statements (if the taxes are paid through your lender).

What Types of Property Taxes Are Deductible? A Breakdown

Deductions are permitted on taxes paid for the following property types:

• Primary residences
• Vacation homes
• Vacant land
• Rental properties
• Cars, boats, RVs, and other types of vehicles

Not all property taxes are deductible, however. Some examples of non-deductible property taxes include:

• Taxes levied on property that you do not legally own
• Property taxes that have not yet been paid
• Tax assessments
• Portions of your property tax bill that cover other services (such as water or sewer)
• Taxes related to the sale of a property

Remember that any taxes paid exceeding the SALT cap of $10,000 will not qualify for a property tax deduction.

State vs. Federal Property Tax Deductions: Key Differences Explained

Although state and federal tax laws may allow property tax deductions, key differences exist and should be considered. At the federal level, property tax deductions are subject to the SALT cap, which limits the total deduction for state, local, and property taxes to $10,000 (or $5,000 for married couples filing separately. However, this cap does not apply to all state returns. Some states allow full property tax deductions without limits. Eligibility and itemization rules often vary between federal and state tax returns, so it is important to check your state’s specific laws for guidance.

Can You Deduct Property Taxes on a Second Home or Rental Property?

You can deduct property taxes on a second home the same way and under the same rules that allow you to deduct property taxes paid on your primary home, as long as you’ve paid those taxes and itemized your deductions. You can also deduct property taxes you paid on any rental property you own, but this is done using Schedule E and is not subject to the SALT cap. Deducting property taxes you paid on a rental property can reduce your taxable rental income.

While taxpayers looking for deductions related to their primary home are often disappointed that the answer to the question, “Is home insurance tax deductible?” is no, rental property owners are usually relieved to find that they can deduct homeowner's insurance premiums paid on rental properties.

How to Claim a Property Tax Deduction on Your Tax Return: Step-by-Step Guide

Here are step-by-step instructions on claiming a property tax deduction on your federal tax return:

1. Access your tax records: You can get a copy of your real property tax bill from your local taxing authority. The amount you paid in real property taxes may also be found on Form 1098, your annual mortgage statement. Look closely at any registration documents related to movable assets such as a car, boat, or RV, as any taxes paid related to that personal property may also be deductible.
2. Exclude non-deductible items: Property taxes may only be deducted when a property is assessed uniformly and at a similar rate across your community. The taxes must be used for the general welfare of the community, not as a payment for special services or privileges. In some instances, the taxing authority will assess improvements made on the home and include them in your tax bill, but those are not deductible if they do not qualify as a tax.
3. File your return with a Schedule A: Those who wish to deduct their property taxes must file a Schedule A as part of their tax return, meaning they must itemize their taxes rather than take the standard deduction. While itemizing can take more time, the reward is the possibility of a lower tax bill. 

Common Mistakes to Avoid When Deducting Property Taxes on Your Taxes

When deducting property taxes on your taxes, you should avoid any mistakes that can trigger IRS scrutiny. Common errors include overestimating the deductible amount, deducting non-qualifying fees like assessments for local benefits, or failing to itemize deductions correctly. Others overlook the $10,000 SALT cap.

To avoid these pitfalls, review IRS guidelines carefully, keep detailed records, and ensure all deductions are eligible. Tax software or consulting a tax professional can help you stay compliant and maximize your return without raising red flags. Accuracy is key when deducting property taxes on your taxes