What is a property tax deduction? |How much of your property taxes are deductible? |Pros & cons of property tax deduction | Property tax deductions for homeowners | Real estate investing tax deductions |
As a homeowner, you’ll be able to take advantage of several perks, and tax deductions are among the most lucrative. That said, you won’t be able to take advantage of them automatically. You’ll have to claim them on your tax forms, which means you’ll need to be prepared with the relevant information ahead of time.
Whether you’re a homeowner or a real estate investor, it’s essential to understand what tax deductions you can take advantage of, and how you can maximize your benefits. Let’s take a closer look at the best property tax deduction strategies for the current tax year.
What Is A Property Tax Deduction?
Federal income tax code allows property owners to deduct state and local property tax from their federal taxes. Beginning in 2018, the limit for the deduction is $5,000 for individuals or married taxpayers filing separately. For married couples filing jointly, the limit is $10,000. The cap was set by Congress in 2017 when the Tax Cuts and Jobs Act was passed.
Whether or not you can deduct all of your property taxes or just some of them will depend on the exact taxes you pay. Property taxes are deductible from your federal tax bill if the tax contributes to the “public welfare.” Most property taxes in the U.S. support local school districts, so they fall into this category. That said, taxes for trash collection and maintenance of public spaces are not deductible. You can also only claim a tax deduction for your primary residence – not for vacation homes or investment properties.
How Does A Property Tax Deduction Work?
Property taxes vary from state to state, and even from municipality to municipality, and are calculated as a percentage of the property’s value. If you want to claim a property tax deduction on your federal taxes, you’ll need to file a Schedule A form, and itemize your deductions. If you haven’t itemized your deductions before, it’s wise to talk to a qualified financial professional, so they can walk you through the process.
It’s also worth considering whether the deduction is worth taking. The Tax Cuts and Jobs Act also changed the standard deduction, so you’ll need to weigh your options. If the only individual item you can deduct is your property tax bill, it’s probably best just to take the standard deduction. Once again, talk to a financial professional before you make any decisions.
[ Rental property investor, rehabber or wholesaler? Get to know which investing strategy is the best fit for YOU by attending our FREE online real estate class. ]
How Much Of Your Property Taxes Are Deductible?
So, how much of your property taxes can you deduct? It all comes down to the 2017 Tax Cuts and Jobs Act, which changed the rules for both itemized deductions and the standard deduction. Let’s look a little bit closer at each:
Itemized property tax deductions – Starting in 2018, the maximum deduction for state and local taxes (SALT) is $5,000 for people filing as individuals or as married filing separately. For couples filing jointly, the limit is $10,000. If you may more than that in property taxes, you won’t be able to deduct the full amount. Moreover, the SALT deduction includes state and local income taxes, as well as sales tax and other local taxes. Depending on how much you earn, you can easily exceed the SALT deduction limit even before you take property tax into account.
Standard tax deductions – While the Tax Cuts and Jobs Act reduced the limit for SALT deductions, it actually increased the standard deduction. Single filers can claim a deduction of $12,550, while married couples filing jointly can claim $25,100. If you’re filing as a head of household, you can claim a cool $18,800.
What Property Tax Is Not Deductible?
As we discussed, not all property taxes are deductible for federal income tax purposes. Here are some of the types of property tax you can’t deduct:
Taxes for services like water, sewer, and trash pickup.
Taxes that you haven’t paid yet.
Taxes you paid on properties that you don’t own.
Special assessments for new infrastructure such as water lines, sidewalks, roads, and in-ground electrical. Taxes and assessments for maintenance and repair of existing infrastructure, on the other hand, are deductible.
HOA assessments, fines, and other fees.
Real estate transfer taxes.
Financing payments for energy-saving improvements like solar panels. However, the interest on those loans can be considered home mortgage interest, which makes it deductible.
Any amount over $5,000, including deductions for other state and local taxes. This goes up to $10,000 for couples filing jointly.
Pros & Cons Of Property Tax Deduction
The main benefit of a property tax deduction is obvious – it saves you money. You’re already paying property taxes to your state or local government. The least you can do is give yourself a break and claim the deduction on your federal taxes. You’ll have to itemize your deductions, and depending on your other deductions, it may not be worth claiming. But in many cases, you’ll save a significant sum on your federal tax bill. The benefits of the deduction also go beyond individual homeowners. By reducing the overall tax liability, this deduction encourages more people to buy homes to begin with.
The main downside of the property tax deduction is the limit set by the Tax Cuts and Jobs Act. Prior to 2018, there was no limit to the amount of money you could claim in your SALT deduction. In higher-tax states, it almost always made more sense to itemize your deduction and maximize your benefits. Nowadays, it makes far more sense for most people to take the standard deduction. On a broader level, many lawmakers argue that property tax deductions encourage people to buy homes that they cannot afford, pushing them into an unsustainable level of debt. There have even been proposals to entirely eliminate the deduction.
Property Tax Deductions for Homeowners
When it comes to buying a home versus renting one, one of the main benefits of ownership is the number of tax benefits. It’s true that the Tax Cuts and Jobs Act put a cap on your deductions for property taxes in particular. But there are many other tax perks that homeowners can take advantage of. This isn’t only limited to federal taxes. There are many state and local deductions for sales and income tax, as well. With so many differences between different states and municipalities, it’s well worth hiring a qualified tax advisor.
On the federal level, you can deduct the interest portion of your mortgage payments. Your mortgage provider will send you a form at the end of the year, detailing the amount of interest you’ve paid. This deduction is capped at $750,000 per year for homes purchased starting in 2018. For homes purchased in 2017 and earlier, the limit is $1 million per year. If you owe money on your taxes, you can actually convert some of this deduction to a mortgage credit certificate (MCC), to offset some of your liability.
Here’s a more detailed breakdown:
Real Estate Investing Tax Deductions
As we mentioned previously, you can’t claim a property tax deduction for investment properties. But that’s just fine! A savvy investor can still take advantage of several tax benefits, including some that go even further than the property tax deduction. One of the biggest ways to save is to set up an LLC and take advantage of the pass-through deduction. You can deduct 20% of any income you’ve paid yourself through the LLC with the pass-through deduction. It might not save your business any money, but it’s a huge break on your personal taxes.
If your investment property is a rental, you can claim a number of expenses as deductions. You can deduct the cost of repairs, management, and other costs of day-to-day operations. You can claim a deduction for any depreciation in the property’s value, and even for appliances in the property that belong to you. There’s also a more complicated benefit called a 1031 exchange, which comes into play when you use the profits from one investment property to pay for another, similar property.
Here’s an in-depth view of tax deductions for real estate investors:
How To Claim A Property Tax Deduction
Let’s say you’ve done the math, and you’ll save money by itemizing your deductions. How do you move forward? Here’s a quick overview of how to claim a property tax deduction:
Verify your eligibility – If you’ve done your research, you’ll already have a list of the deductions you’re claiming. But before you fill out that Schedule A form, it doesn’t hurt to double-check. Go through your deductions, and make sure you actually qualify for all of them. Also double-check your math. It’s no fun to fill out an entire Schedule A form, only to realize you’ll save more with the standard deduction after all.
Obtain a copy of your property tax records – In most locations, your local government will send your property tax bills twice a year. If you haven’t saved yours, you can contact the relevant tax authority and obtain a copy. This way you know exactly how much you’ve paid, and how much you can deduct. Property tax deductions cannot be carried forward; they can only be claimed in the year the taxes were paid.
Double-check your escrow account – If you’re still paying a mortgage, your property tax payments are most likely being made out of an escrow account, overseen by your lender. At the end of the year, you’ll receive a 1098 statement, which outlines how much of this money was actually paid in taxes. The statement will oftentimes also show you how much tax-deductible interest you’ve paid on the mortgage itself.
File your Schedule A form – Now that you’ve got all your ducks in a row, all you have to do is fill out the IRS Schedule A form, along with your ordinary 1040. Send it in before the deadline, and you’ll get the full benefit of your deduction.
How To Get A Larger Property Tax Deduction
Before we wrap up, here are a few ways to maximize your property tax deduction:
Pay your property taxes early – If your state or local government allows you to pay early, consider making a December payment, so you can claim it on April’s taxes.
Go over your closing paperwork – If you just bought a house this year, take a look at the closing statement. There’s probably a large tax payment in there, which can be easy to miss.
Check your vehicle registration receipt – Many states add a property tax fee to their vehicle registrations. If that’s the case, this small fee is deductible.
A property tax deduction isn’t the right choice for everybody. For many people, taking the standard deduction is the ideal way to move forward. But if you have other deductible expenses, a property tax deduction can net you significant savings on your federal tax bill. As a result, it’s well worth understanding.
Ready to start taking advantage of the current opportunities in the real estate market?
Whether you’re brand new to investing or have closed a few deals, our new online real estate class will cover everything you need to know to help you get started with real estate investing. Expert investor Than Merrill explains the best real estate strategies to help get you on the path towards a better financial future.
Register for our FREE 1-Day Real Estate Webinar and get started learning how to invest in today’s real estate market!