One of the most significant tax benefits you obtain when you own your home is the ability to deduct your real estate taxes. All the taxes you pay on your home based on its assessed value are fully deductible as an itemized personal deduction on Form 1040 Schedule A.
Typically, your monthly mortgage payment to your mortgage holder will include property taxes due on the home. Your mortgage holder then pays your local taxing agency on their due dates. Your mortgage holder should provide you with a statement at the end of the year showing how much property tax you paid and the date of the payments. Only payments actually made by your mortgage holder during the year are deductible for that year.
What About Condominiums?
If you own a condominium, the real estate taxes you pay on your separate unit are fully deductible. In addition, you may deduct your pro rata share of property tax paid on the common areas by your homeowner's association.
Special Assessments Not Deductible
Real estate taxes imposed by government agencies to fund specific local benefits for property, such as streets, sidewalks, sewer lines, and water mains, are not deductible where they are imposed only on the property owners who will benefit from them. However, there is an exception to this rule: Any part of a special assessment you pay that is for maintenance, repairs, or an interest charge for a local benefit for your property is deductible. But you may claim this deduction only if the taxing authority sends you an itemized tax bill separately listing the amounts you must pay for construction, interest, and maintenance.
Example: A city assessed a front foot benefit charge against property that was benefited by construction of a water system. The city’s tax bill itemized the charge, showing how much was assessed for construction of the water system, interest, and maintenance costs. The homeowners were allowed to currently deduct the amounts for interest and maintenance. (Rev. Rul. 79-201.)
Nondeductible special assessments can still have a tax benefit: Because such assessments increase the value of your property, you get to add what you pay for them to the tax basis of your property. This will reduce the amount of profit you earn if you sell your home at a gain. (Of course, this profit may not be taxable anyway if you qualify for the $250,000 or $500/000 home sale tax exclusion; see "The $250,000/$500,000 Home Sale Tax Exclusion."
If you own a condominium and your homeowner's association imposes special assessments to pay for capital improvements to the common areas such as a new roof or new swimming pool, you get no deduction but you may add the amount to your condo's tax basis.