Everything You Need to Know About Property Tax Deduction

There are several things you should know about property tax deduction and the tax benefits of owning property. Check out this guide to learn more.

In 2016, state and local governments collected a total of $503 billion from property tax revenue.

Quite a bit of your money goes towards this tax, so is there any way to reduce it? If you pay for property taxes, then there is a chance that you can receive tax breaks on your income tax.
In this article, we will discuss everything you need to know about property tax deduction and other ways of saving money with real estate.

What is a Property Tax Deduction?

Property Tax Deduction
A property tax is a tax on things like land, buildings, inventories, motor vehicles, and certain types of equipment. If you pay a property tax on things you own, then you might be able to deduct them from your federal income tax bill.

Where does this deduction come from? The deductions are federal funds sent toward areas that institute a property tax.

The funds allow the government to raise the overall revenue without increasing the cost that constituents pay. If you itemize your deductions on your federal tax return, then you can reduce up to $10,000 on your federal tax return.

What Things Are Deductible from Property Tax?

You can deduct up to $10,000 for certain combinations of property taxes you pay.

These include things like houses, vacation houses, land, apartments, any property outside the United States, boats, cars, RVs and other vehicles.

If you paid taxes on any of these things, then you potentially can deduct them from your federal taxable income.

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What Things Aren’t Deductible from Property Tax?

Deductible from Property Tax
Unfortunately, there are lots of things you can’t deduct from your property tax.

The main things are property you don’t own or haven’t paid the taxes for yet. If you do own property, then you cannot deduct more than $10,000 worth.

There are also things you can’t deduct like the assessment of public utilities, electric/gas/water services, and transfer taxes after you sell a house.

You can’t get back the money you paid on loans for energy-saving home improvements, or any assessments made by the Homeowner’s Association

What Are Some Other Benefits to Owning Property?

There are a lot of tax benefits and deductions you receive simply from owning property. Here are some of the main reasons you should buy property if you can.

Imputed Rent

One of the most important benefits of owning property is the imputed rent that remains excluded from your taxable income. This differs from landlords and renters.

A landlord must count the rent they receive from renters as income. Renters can’t deduct any rent they pay. So in comparison, you’re essentially living rent-free when it comes to taxes.

Money Made from Home Sales

You make a lot of money on the real estate market buying and selling homes. Unfortunately, a portion of that money becomes taxed thanks to the capital gains tax.

However, there is a way that the taxpayers can exclude between $250 thousand and $500 thousand from the capital gains tax when they sell their house. Homeowners who want these deductibles must do two things.

First, they must use the house as their principal residence for two out of five years.

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Second, they must not of used the capital gains exclusion within two years on a different home. If you meet these two criteria, then you can save a lot in taxable income.

Mortgage Interest Deduction

Mortgage Interest Deduction
Most people purchase a home through a mortgage loan.

If you’re a homeowner who itemizes their deductions, then you may be able to deduct the interest you pay on your mortgage from your taxable income. This tax break used to be much more beneficial for homeowners.

Unfortunately, it’s been reduced after the passage of the Tax Cuts and Job Act. Now, you can deduct the interest you paid on a first or second home after purchasing it or improving it as long as it doesn’t exceed $750 thousand.

Before the Tax Cuts and Job Act, the interest cap was one million dollars. You could also deduct any interest you paid on home equity debt as long as it didn’t exceed $100 thousand.

Now, the act eliminated any home equity deductions, but you can still save money on the interest.

Points

If you refinanced with a new loan, then you may qualify for another deductible. If you took out a line of credit within home equity, then you receive points for paying off the life of the loan.

$1,000 would count as 1 point in a $100 thousand loan. Points are essentially a whole percentage number of the loan you’re paying off. If you pay the lender these gradual points on time, then you receive a deduction.

How to Avoid Taxes When Selling a Home

When you buy or sell a house you will likely need to pay the closing real estate tax and the tax assessor for their service.

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You can get some deductions on your federal income tax, but these are a hassle to fill out. You need to organize with the seller or buyer what percentage of the tax you’ll split.

What’s more, if the seller has delinquent tax payments, you can not deduct those payments from your tax return.

One solution to buying and selling property is a 1031 exchange. The process refers to a like-kind exchange between two investment properties. It’s hard to meet the requirements, but even a failed 1031 exchange can have tax benefits — read more here.

How Do You Deduct the Property Tax

If you want to deduct your property tax, then the first step involves getting your hands on the tax records of your home and any assets you have like vehicles.

Once you complete an assessment of the uniform rates of similar properties, then you can fill out your tax return.

Use the Schedule A section to itemize your taxes and figure out your deduction. You can find a sample version here. Fill that out and then pay your property taxes in the year you plan to deduct them.