Buying a home involves more than just the cost of the house and land. Real estate taxes are collected by local authorities from homeowners. The tax amount varies based on factors such as where you live and the cost of the other homes in the area. Real estate taxes are deductible from your federal income taxes even if they are paid through an escrow account.
Real Estate Taxes
Counties, townships and cities collect property taxes from their residents. Each taxing authority has an assessment process to determine property values. The taxes charged are based on a percentage of the assessed value. Real estate taxes generally increase over time, as the value of your property appreciates and the cost of living rises. The funds received from real estate taxes go toward services such as schools, public safety and roadway maintenance. Failure to pay property taxes can result in a lien being placed on your property and eventually foreclosure.
Escrow accounts are maintained by your mortgage lender. If you participate in an escrow program, you pay an additional amount on top of your loan repayment each month. The extra money is placed in the escrow account to be saved to pay for property taxes, homeowner's insurance or association fees. The lender is responsible to make the payment to the proper entity on your behalf. An escrow account is often a requirement of your mortgage company, especially if you bought your home with less than a 20 percent down payment. This ensures the mortgage company that all of your real estate taxes and other fees will be paid on time. The company also has an interest in your property until the loan is paid in full.
Homeowners are allowed to deduct property taxes paid during a given tax year, weather they were paid into an escrow account or directly to the taxing authority. There is one catch -- the taxes must be determined by the property's assessed value and in the same manner as the other properties in the same taxing district to be deductible. Your mortgage lender should provide you with a statement showing what it collected and what was paid out to the taxing authority over the year. If you are not provided this, you must request it to provide to your tax preparer. The deduction is claimed on Internal Revenue Service Form 1040, Section A.
Some of the money paid into property taxes isn't deductible. Taxes charged for projects such as new sidewalks in your community are considered to increase your property's value, so they are not deductible. Homeowner's association fees and fees charged for services such as refuse removal are also nondeductible. You may pay these fees each month into your escrow. Additionally, your mortgage company may charge you a slightly higher amount so it can have extra funds on reserve. Remember, only the actual payment made to the taxing authority for eligible property taxes by the lender on your behalf are tax deductible.
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- Does the HAMP Program Require an Escrow Account for Property Tax?
- Penalties of Non-Payment of Property Tax
- Can Taxes You Pay on Your House Be Deducted on Your Federal Return?
- What Does an Escrow Account Cover?
- What Is an Escrow Refund?
- What Is an Escrow Overpayment?
- Can I Claim Land & County Taxes on My Tax Return Form?