Unlike regularly property tax, assessments for streets are based on the size of your property, not on its value. Special assessments pay for improvements -- such as street lights and sidewalks -- or for the cost of maintaining them. These special assessments may or may not be deductible if you itemize.
Regular property taxes based on what your home is worth are an itemized deduction on Schedule A. Property tax assessments for improvements are not an income tax deduction. Assessments to maintain the street improvements or repair them are deductible, however, just like regular property taxes. If you pay, say $50 in property tax this year toward the cost of maintaining the new sidewalk, that's a $50 deduction. If you don't itemize, there's no write-off.
Assessments for improvements can affect the capital gains taxes you pay after you sell your property. Your gain is the difference between your sales price and your adjusted basis. The basis is your purchase price, adjusted for various expenses including the special assessment. If you buy the house for $190,000 and pay $10,000 in assessments over the years to add sidewalks and sewer lines, your adjusted basis is $200,000. That's going to cut your taxable gain when you sell.
In many cases, adding the assessment to your basis won't affect your taxes at all. When you sell your primary home, there's no capital gains tax if the gain is less than $250,000 and you lived there two of the five years before the sale. If the gain was, say, only $50,000, all your gain is excluded from tax. You're more likely to see tax savings if it's a rental property, where all the gain is taxable.
The IRS can look at your filed tax returns up to three years back in an audit, or six years if they suspect you've under-reported taxes by 25 percent. If you take a tax write-off for your property taxes, it's a good idea to hang on to the records until six years have passed, just in case. If you pay assessments that affect your basis, keep the records until you sell the property. Then keep them six years more, so that if the IRS audits the sale, you can prove you adjusted the basis properly.
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