Property taxes can add up fast, especially if you have to pay them on multiple items like your house, car and boat. Luckily for you, Uncle Sam provides some relief and lets you claim a tax deduction for qualifying property taxes. However, you can only take advantage of the real estate tax deduction if you itemize.
Property Taxes to Claim
You can usually write off both your personal property taxes and real estate taxes. Personal property taxes are deductible if charged by state or local governments. You can claim property taxes if you pay them to a state, local or even foreign government. The deductible tax in a property tax deduction must be based on the value of the property and assessed at least yearly. For example, if your state charges you an annual car fee of $50 plus 0.5 percent of your car's value and your total bill is $110, you could deduct only $60 because that's the portion that's based on your car's value.
Regardless of which year's property tax you're paying, you deduct the property taxes in the year that you pay them, not the year they were due. In addition, use the year the money actually goes to the taxing authority.
Both the personal property tax and real estate tax write-offs can only be claimed if you itemize and forgo the standard deduction. To itemize, use Schedule A and Form 1040. On Schedule A, report your personal property taxes, like your car or boat taxes, on line 6. On line 7, report your real estate taxes, like the taxes on your main home. These will be combined with your other deductions and subtracted from your taxable income.
A common disconnect is property taxes you pay through your mortgage lender with an escrow account. Instead of deducting the money in the year that you put the money in the escrow account, you must wait until the year it is paid from the escrow account to the taxing authority.
You can't deduct any costs that you pay for services, such as water or trash, or improvements even if you pay them to the same governing body with the same check. For example, if your $1,000 property tax bill includes $50 for trash collection and $30 for water use, you could only deduct $920 as property taxes. Similarly, if $40 of your property taxes go toward maintaining sewers and sidewalks, that also isn't deductible.
New for 2018
The itemized deduction for property taxes on your federal return is limited to $10,000. That includes real estate taxes and personal property tax. Some states with high property taxes considered strategies to offset that loss, but the IRS warned states not to challenge the law. The latest IRS instructions on property tax deductions can be found here.
If You're Filing for 2017
If you're still doing your 2017 taxes, you don't have to worry about a limit on itemized deduction of your property taxes. You can deduct it for a main home, vacation home or personal property tax. You cannot, however, deduct property taxes on rental property, because that is considered an expense, not a deduction.
- Internal Revenue Service: Topic 503 - Deductible Taxes
- Internal Revenue Service: Schedule A Instructions
- New York Times: IRS Warns States Not to Circumvent State and Local Tax Cap
- IRS: Publication 530, Tax Information for Homeowners
- Turbo Tax: Can I Deduct Property (Real Estate) Taxes?
- Business Insider: Before You Rush To Pay Your Personal Property Tax Bill, Make Sure The IRS Will Allow The Deduction
Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."