Real Estate Tax Deductions Under the Law

Homeowners generally will need to pay property taxes that are based on the value of their home. You can deduct these local taxes from your federal income taxes, up to a limit of $10,000 per year. This limit was imposed by the Tax Cuts and Jobs Act, which took effect in 2018, and it will last until at least 2025. The limit covers not only real estate taxes but also personal property taxes and income taxes (or sales taxes).

You can deduct your property taxes only if you itemize your personal deductions. Most people do not itemize their personal deductions but instead claim the standard deduction. This is because the Tax Cuts and Jobs Act substantially increased the amount of the standard deduction, such that it is more cost-efficient to take the standard deduction unless you have many itemized deductions. Perhaps 10 percent of taxpayers now itemize their deductions. The remaining 90 percent no longer will be able to deduct their property taxes. This does not necessarily mean that they incur a loss, though, since the larger standard deduction and other benefits under the Tax Cuts and Jobs Act may outweigh the property tax deduction that they could have claimed otherwise.

When the Deduction Applies

The buyer of a property is considered under federal tax law to start paying property taxes as of the date of the property sale. You can find this date on the settlement statement in your closing documents. Either the buyer or the seller may agree to pay the entire amount of property taxes for that year, but federal tax law treats them as though they each paid the percentage of the property taxes that was proportionate to the period during which they owned the property in that year. The buyer and the seller each can deduct their share of the property taxes for the year in which the property was sold, unless either of them chooses the standard deduction instead of itemizing their deductions.

Exclusions From the Deduction

Charges for services and assessments for local benefits do not count as property taxes that qualify for a deduction. Your property tax bill will show you whether you paid for any non-deductible itemized charges for services. These may include items such as a periodic charge for trash collection, a unit fee for water services, or a flat fee for a single service provided by the local government. For example, you might be charged a fee for landscaping costs paid by the city if your landscaping failed to comply with a city ordinance.

Assessments are charges for improvements by the local government that increase the value of your property. The government might have built a road that provided better access to your property, or it might have improved the water system in the area. These assessments will increase the tax basis of your home, which will decrease your taxable profits if you sell your home, but you cannot deduct them from your federal taxes.

However, you sometimes can claim a deduction for part of a special assessment that is related to repairs, maintenance, or interest. You would need to ask the agency that collects property taxes to provide you with an itemized tax bill that states these specific amounts.

Last reviewed October 2024