If you’ve been an adult for, like, two seconds, you know how frustrating wealth-building (or paying off debt) can be when you’re paying so. many. taxes. You buy groceries, you pay a tax. You buy gas, you pay a tax. You buy a home, yep, you pay a tax.
The good news? If you own a home, or other Uncle Sam-approved property, you can potentially knock off a hefty sum from your federal income taxes with a property tax deduction. But what exactly is “Uncle Sam approved” property? And how do you claim property taxes? Let’s get into it and find out.
What Is the Property Tax Deduction?
First things first—let’s talk about property taxes.
The property tax deduction is basically the IRS’s way of saying, “Hey, look, we get it—you already paid property taxes this year to your city or state, so go ahead and deduct them from your federal income taxes.”
When you own property, you pay a tax to your state or local government based on where you live and the value of your property. The property tax deduction is basically the IRS’s way of saying, “Hey, look, we get it—you already paid property taxes this year to your city or state, so go ahead and deduct them from your federal income taxes.”
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Sounds nice, right? Well, before you get too excited, there are some ground rules around property taxes you should be aware of.
1. The IRS caps property taxes at $10,000 ($5,000 if you’re married filing separately). You may think, Oh good I don’t pay that much for property taxes. But keep in mind this limit isn’t just for property taxes: It includes income and sales taxes too (otherwise known as the SALT deduction). Basically, in the eyes of the IRS, all state and local taxes are bundled together, which means if you’re deducting income or sales taxes, you’ll have to take those into account too.
2. You have to own the property you’re paying taxes on to claim the property tax deduction. Let’s say you’re helping your parents by paying their property taxes. Even though you paid the tax, you don’t qualify because you don’t own the property.
You have to own the property you’re paying taxes on to claim the property tax deduction.
3. Property taxes are deductible in the year they’re paid, not the year they’re assessed. So, if you get your property tax bill in December 2019, and you don’t pay it until 2020, you’d have to wait until 2021 (when you file your 2020 taxes) to deduct those property taxes.
Property taxes are deductible in the year they’re paid, not the year they’re assessed.
4. If you’re using an escrow account to pay property taxes, don’t deduct the amount you put in. Deduct the amount of taxes you actually pay. Even though you put money aside in an escrow account, you’re not paying property taxes until your lender actually pays the tax, which could be significantly less than what you put aside for the year. Only deduct what your lender pays out, which you should be able to find on Form 1098.
What Property Is Deductible?
Alright, now that we got the rules out of the way, let’s get to the fun stuff. If you pay property taxes on any of these things, you can potentially deduct them from your federal taxes:
- Your main home
- Vacation home
- Cars, RVs and other vehicles
- Mortgage interest
What’s Not Deductible?
Ah, man—there’s stuff we can’t deduct? Unfortunately, yes. Here are some of the most common examples.
- Property taxes on property you don’t own
- Constructing a sidewalk, sewage system or road in your neighborhood (on the bright side: taxes on the maintenance or repair of these things is deductible)
- Renovations to your home (even if they add value to your property)
- Payments on loans for energy-saving home improvements (yep—debt still has no benefit)
- Taxes paid on rental or commercial property
- Cost of utilities and services, such as gas, water, sewer and trash collection
- Property taxes you haven’t paid yet (gasp!)
- Taxes you pay when transferring the sale of a house
While you obviously can’t deduct everything under the sun, let’s look at the bright side. Deducting property taxes is a great way to save on your taxes if you own property. There may be other things you can and can’t deduct, so when in doubt reach out to a tax pro!
How to Claim Property Tax Deductions
Now let’s get to the part we’ve all been waiting for—how do you claim property taxes on your federal income taxes?
1. Be sure you’re itemizing your deductions.
Yes, it’s the age-old question—will you itemize or take the standard deduction? If taking the standard deduction will result in a lower tax bill, don’t waste your time claiming property taxes—only claim property taxes if you choose to itemize. (Not sure if you should itemize or take the standard deduction? Find help here.)
2. Find tax bills for your property taxes.
This isn’t the time to guesstimate how much you paid in property taxes for the year. You want to be super accurate. Find bank statements if you paid the taxes yourself, or go to your city tax assessor’s website and search for your property tax records.
3. List your property taxes in Schedule A.
When you’re itemizing your deductions, you list them in Schedule A, which you’ll then attach to your 1040. Remember that your property taxes are bundled with income or sales taxes, and the sum of all of them cannot be more than $10,000 (or $5,000 if you’re married and filing separately).
When in Doubt, Contact a Tax Pro
Look, trying to understand how much you owe in property taxes can definitely make your head spin, especially when tax percentages vary depending on your county. If you have a relatively simple return and want to try filing on your own, check out RamseySmartTax.
If you feel like you need extra help, reach out to a tax Endorsed Local Provider (ELP)—they’ll help you figure out what you owe in property taxes and make sure you’re on the right path to getting your taxes done right.
If that doesn’t give you a reason to dance—all two left feet dancers and all—then we don’t know what will!