Federal law allows you to deduct property taxes–or, to use the IRS’s term,”real estate taxes”–from the taxable income. You may deduct only those property taxes that you paid during the tax year, if directly to the taxing authority, via an escrow account maintained by your mortgage lender or at settlement once you purchased your home.
Elements
To be allowable, the house tax must be levied according to the appraised value of your house. A property tax of $10 per $1,000 of value, as an instance, would be allowable; a flat fee of $100 per home wouldn’t. All property within the taxing jurisdiction’s authority must be subject to the same uniform rate. And only the portion of the tax that rewards the”welfare of the public” is allowable. That means that if a part of your property tax bill is a specific charge for something like trash collection, you can’t deduct that portion. Special tax assessments for”local benefits” such as roads, sidewalks and sewers may or might not be deductible. The IRS claims that if a brand new benefit raises the value of your home, then it is not deductible. However, tests for upkeep of present benefits are allowable. So an appraisal to get a brand-new street to your house probably is not allowable; a later appraisal for repaving that street likely is.
Considerations
Many homeowners pay their property taxes via”escrow”: Their monthly mortgage payment contains a certain amount of money for property taxes. Their lender collects that cash in a separate escrow account and pays the taxes when due. Only the amount actually paid in earnings during the year is deductible–not the total paid to escrow. Real-estate”transfer taxation” are penalties billed upon the selling of a home to cover the governmental paperwork involved in documenting the change in possession. These are not deductible because they are a tax upon the sale of the home, not the value of the property.
Sales
When a home is sold, the real estate taxes for the current tax cycle must be divided between the seller and the buyer. The cutoff point is that the sale date. As far as the IRS is concerned, the seller paid all the property taxes before the sale , and the buyer paid all of the property taxes on the sale date and then. You may only deduct the portion of the taxes that applies to your own time of ownership–regardless of who paid the taxes. As part of a home sale, the seller may often agree to pay some real estate taxesthrough the end of the cycle, for instance –but that does not have any effect on deductibility.
Identification
If you pay your property taxes through escrow, you’ll get a statement from the lender each year telling you how much was paid on your behalf. Any property taxes paid at settlement once you purchased a home will be recognized on the settlement announcement, also called the”HUD-1″ form.
Claiming
Generally, you must itemize your deductions in order to deduct real estate taxes. But, the government has permitted a limited property tax deduction for people who don’t itemize. This was true in 2008 and 2009. Check the instructions that go together with your tax form.