Deducting Real Estate Taxes On Your Home

For decades, one of the most significant tax benefits you obtain when you own your home has been the ability to deduct your real estate taxes. These taxes are still deductible by homeowners who itemize their personal deduction on Form 1040 Schedule A, but the deduction has been capped by the Tax Cuts and Jobs Act.

$10,000 Annual Cap On Property Tax Deduction

One of the most significant changes brought about by the Tax Cuts and Jobs Act (TCJA) was the imposition of a $10,000 annual cap on the itemized deduction for state and local taxes, which had never been limited before. Starting in 2018 and continuing through 2025, homeowners may deduct a maximum of $10,000 of their total payments for:

• property tax, and
• state income tax or state and local sales tax.

This $10,000 limit applies to both single and married taxpayers and is not indexed for inflation.

Example: Homeowner Hal paid $12,000 in property tax this year and $4,000 in state income tax. He may deduct a total of $10,000 of these tax payments. The remaining $6,000 is not deductible.

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.

Deduction Only Available for Homeowners Who Itemize

Property tax is only deductible by homeowners who itemize their personal deductions on IRS Schedule A instead of taking the standard deduction. Homeowners who take the standard deduction get no deduction for their property tax. As a result of TCJA, which went into effect in 2018, far fewer homeowners will be able to itemize their personal deductions than ever before. Thus, far fewer homeowners will be able to deduct their property taxes.

A homeowner should itemize only if his or her itemized deductions, including property taxes, exceed the standard deduction. The TCJA roughly doubled the standard deduction to $12,000 for single taxpayers and $24,000 for marrieds filing jointly. At the same time, the TCJA eliminated many deductions that used to qualify as personal itemized deductions, such as unreimbursed employee expenses, moving expenses, and many others. As a result of all this, the vast majority of taxpayers will now be better off if they take the standard deduction instead of itemizing. In the past years, about 21% of all households deducted property taxes as an itemized deduction. It has been estimated that, because of the TCJA, as few as 4% of all households will be able to deduct property tax during 2018 through 2025

What About Condominiums?

If you own a condominium, the real estate taxes you pay on your separate unit are deductible up to the $10,000 annual limit. 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 Nolo's article 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.