Deducting State and Local Real Estate Taxes and Fees

Real estate tax deductions available to homeowners.

One of the bad things about owning a home is that you'll have to pay various state and local taxes that people who aren't homeowners are not required to pay. However, one of the good things about owning a home is that you are allowed to deduct many of these taxes from your income taxes. Here's an overview of taxes you can--and cannot--deduct.

Property Taxes

State and local property taxes are deductible by a homeowner as an itemized personal deduction on IRS Schedule A so long as they are true property tax. A "true" property tax is one levied for the general public welfare, based on the assessed value of real property, and charged uniformly against all property under the jurisdiction of the taxing authority.

Thus, for example, the typical property tax imposed by a city or county on homeowners to fund the local schools and/or government is fully deductible. However, real estate taxes imposed 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.

Example: California imposed a special assessment for fire protection on rural landowners with structures on their property. The IRS said that the fee didn't qualify as a deductible real property tax because it was: (1) imposed only against specific property to provide a local benefit, (2) imposed only against property in areas where the state provided fire protection services, not on all property within the state's jurisdiction, and (3) it was not based on property value or structure size--instead, a $150 fee was imposed against each structure no matter how large or small. (CCA 201310029.)

But there is an exception to this rule: You may deduct any part of a special assessment you pay that is for maintenance, repairs, or an interest charge for a local benefit for your property. To may claim this deduction, you'll a separate itemized tax bill, sent by the taxing authority, listing the amounts you must pay for construction, interest, and maintenance.

See the Nolo article Deducting Your Property Taxes for more on this subject.

Fees for Garbage and Other Services

Water bills, trash collection fees, sewer charges, and other service charges assessed against your rental property are not real estate taxes. They are nondeductible personal expenses. This is so even if you pay them to your local taxing authority.

Real Estate Transfer Taxes

When you purchase a home, you must ordinarily pay state and local real estate transfer taxes. You cannot deduct these taxes in the year in which you paid them. Instead, you add them to the basis (cost for tax purposes) of your property. This will reduce any taxable gain you realize when you sell your property.

Transfer taxes paid by the seller are deducted from the sales price to reduce the amount realized on the sale.

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