Buying a home is expensive, but it can also bring you some tax savings. The Internal Revenue Service offers tax breaks for home ownership, including a deduction for real estate taxes that can significantly reduce the cost of owning a home. The property tax deduction only applies to the days that you own a home, though, so you cannot deduct a full year's property taxes if you purchase a home during the year.
Deduction for Homebuyers
When you buy a home, the property taxes are divided between you and the seller for income tax purposes. The IRS says that you are considered to have paid all property taxes after the date of sale and on the date of sale, while the seller is considered to have paid all taxes prior to the date of sale. You can only take a tax deduction on the portion of real estate taxes that attributable to the days you owned a home.
Calculating the Deduction
The amount of the deduction you can on real estate taxes in the year you buy a home is equal to the fraction of days you owned the home out of the year times total real estate taxes for the year. For example, if you bought a home in late August, you will have owned the home for 130 days before the end of the year. If the real estate taxes on the home for the year totaled $5,000, you could take a deduction equal to $5,000 times 130/356 or $1,781.
The tax deduction for real estate taxes is a type of itemized deduction. When you file an income tax return you have to choose whether to use all of your itemized deductions or a standard deduction granted to all taxpayers. As of 2012, the standard deduction is $11,900 for married couples filing a joint returns and $5,950 for singles and married people filing separate returns. If the total of your itemized deductions is less than your standard deduction, you won't benefit by claiming itemized deductions like real estate taxes.
The taxes you pay for owning a home aren't always tax deductible. According to the IRS, state and local real estate taxes are deductible when they are based on the assessed value of the property and the government charges a uniform tax rate on all properties in your area. The taxes have to go to the welfare of the general public and cannot go toward special improvements that only benefit you or a select number of people in your neighborhood. For example, if you and your neighbors pay a special tax assessment to get speed bumps installed on your block, the tax assessment is not deductible.
Gregory Hamel has been a writer since September 2008 and has also authored three novels. He has a Bachelor of Arts in economics from St. Olaf College. Hamel maintains a blog focused on massive open online courses and computer programming.