Property Tax Deduction Definition

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Property Tax Deduction Definition

What Is the Property Tax Deduction?

State and local property taxes are often deductible from the property owner’s federal income taxes. Any state, municipal, or international taxes collected for the general public good are deductible real estate taxes. They do not include taxes levied on home improvements or services such as garbage collection.

As previously stated, the Tax Cuts and Jobs Act (TCJA) restricted the property tax deduction, as well as other state and local tax deductions, beginning with 2018 taxes. The deduction for state and local taxes, including property taxes, was limited to $10,000 ($5,000 if married filing separately). There was formerly no limit on the deduction.

Key Takeaways

  • Property taxes are assessed yearly by state and municipal governments depending on the value of a property.
  • A property owner may deduct part or all of the taxes paid on that property if it is used for personal purposes and the owner itemizes deductions on his or her federal tax return.
  • Taxes paid on rental or commercial property, as well as property held by someone other than the taxpayer, cannot be deducted.
  • The deduction for state and local taxes, including property taxes, was reduced to $10,000 in 2018 ($5,000 if married filing separately).

Understanding the Property Tax Deduction

A property owner must pay taxes on the value of the property, which are assessed yearly by a state and/or municipal government. If a property owner uses the property for personal purposes and itemizes deductions on their federal tax return, they may claim a tax deduction for part or all of the property taxes paid.

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Taxes paid at closing when purchasing or selling a house and taxes paid to a county or town’s tax assessor on the assessed value of personal property are examples of real estate taxes that may be deducted. The Internal Revenue Service (IRS) defines personal property as a taxpayer’s principal house, vacation home, land, or foreign property.

Special Considerations

Taxes paid on rental or commercial property, as well as property held by someone other than the taxpayer, cannot be deducted. Furthermore, a purchaser who pays the seller’s outstanding taxes from a previous year at the time the transaction is completed cannot deduct these tax payments on their tax return. Instead, the late tax payment is counted as part of the cost of purchasing the house.

A property owner’s tax bill also includes other things that cannot be subtracted for tax reasons. Payments for improvements made to a local residential area, such as sidewalks, and fees for service delivery, such as garbage collection, are examples of these goods. Refer to Form 1098, which is submitted to the IRS by the bank or lender and mailed to the property owner, to determine what percentage of a tax payment qualifies for the deduction.

Tax Deductions Vs. Tax Credits

How to Claim a Property Tax Deduction

To be eligible for a property tax deduction, the tax must only apply to the value of personal property possessed and be assessed on an annual basis, regardless of when the government collects it from you. As a result, if the state tax was only levied at the time of purchase, it does not fulfill the IRS definition of a deductible personal property tax.

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As previously indicated, property tax may only be deducted if the owner elects to itemize deductions. A taxpayer should itemize deductions if the total of their qualified itemized costs exceeds the standard deduction permitted in a particular tax year.

Pros and Cons of the Property Tax Deduction

There has been some discussion of abolishing the property tax deduction. One criticism is that the deduction, coupled with the federal mortgage interest deduction, discriminates against renters and encourages individuals to take on more debt. Property tax deduction supporters argue that it encourages homeownership.

Starting in 2018, the Tax Cuts and Jobs Act (TCJA) of 2017 limited the deduction for state and local taxes, including property taxes, to a total of $10,000 ($5,000 if married filing separately). There was formerly no limit on the deduction.

Furthermore, under the new rule, homeowners who deduct mortgage interest are restricted to the amount paid on $750,000 of debt, rather than $1 million. Interest on residences purchased on or before December 15, 2017, is guaranteed at the prior rate as a special exemption.

Because the standard deduction rose in 2018, it is expected that fewer homeowners would itemize their deductions in 2019. As a result, fewer property owners will take advantage of the property tax deduction.

Every year, the standard deduction is updated. The standard deduction for married couples filing jointly in 2021 is $25,100. For single taxpayers, the deduction is $12,550. The standard deduction for couples in 2022 is $25,900, while the deduction for single taxpayers is $12,950.

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