A Helpful Guide to Real Estate Taxes and Deductions
By Isaiah Ajala
Real estate taxes are one of the major expenses of owning a property. However, the good news is that you may be able to deduct a portion of your real estate taxes on your tax return. In this blog, we will discuss real estate taxes deductions and how you can take advantage of them.
What are Real Estate Taxes?
Real estate taxes are taxes that are assessed on the value of your property by your local government. These taxes are used to fund local services such as schools, police and fire departments, and road maintenance. The amount of real estate taxes you owe is based on the assessed value of your property, which is determined by your local government. The taxes are usually collected annually or semi-annually.
Deducting Real Estate Taxes
If you own a home, you can deduct a portion of your real estate taxes on your federal income tax return. The deduction is available to both homeowners and those who own investment properties. To claim this deduction, you will need to itemize your deductions on Schedule A of your tax return. This means that you will need to add up all of your deductible expenses, including real estate taxes, and subtract them from your taxable income.
The amount of your real estate taxes deduction will depend on the total amount of property taxes you paid during the year. You can find this information on your property tax statement. You should also keep any receipts or cancelled checks related to your property taxes as proof of payment.
It is important to note that there is a limit on the amount of real estate taxes you can deduct. The Tax Cuts and Jobs Act of 2017 limited the total amount of state and local taxes, including property taxes, that you can deduct on your federal tax return to $10,000. This limit applies to both single and married taxpayers.
Types of Deductions
1. Property Tax Deduction
The most common real estate tax deduction is the property tax deduction. This deduction allows you to deduct the amount you paid in property taxes on your home or other real estate from your taxable income. However, keep in mind that there is a cap on this deduction, which is currently set at $10,000 per tax return for the tax years 2018 through 2025.
2. Mortgage Interest Deduction
Another significant tax deduction for homeowners is the mortgage interest deduction. This deduction allows you to deduct the interest you paid on your mortgage from your taxable income. If you have a mortgage on your home or other real estate, you can deduct the interest you paid on up to $750,000 of debt (or $1 million for mortgages taken out before December 15, 2017).
3. Home Equity Loan Interest Deduction
If you have a home equity loan or line of credit, you may also be able to deduct the interest you paid on that loan from your taxable income. However, there are some restrictions on this deduction. For example, you can only deduct the interest if the loan was used to buy, build, or substantially improve your home.
4. Points Deduction
When you take out a mortgage, you may have to pay "points" to the lender. Points are fees that are paid upfront to reduce the interest rate on your mortgage. You may be able to deduct these points on your tax return. However, there are some restrictions on this deduction, such as the requirement that the points be paid in connection with the purchase or improvement of your primary residence.
5. Energy Efficiency Deductions
If you made certain energy-efficient improvements to your home, such as installing solar panels or energy-efficient windows, you may be able to claim a tax credit for those improvements. The credit is worth up to 26% of the cost of the improvements and can be claimed on your tax return.
6. Rental Property Deductions
If you own rental property, you can also claim various deductions on your tax return, such as deductions for property taxes, mortgage interest, repairs, and depreciation. However, rental property deductions are subject to special rules and limitations, so it's important to consult a tax professional to ensure you're claiming all the deductions you're entitled to.
If you are a new homeowner, you may be able to deduct any prorated real estate taxes that were paid by the previous owner. This amount should be listed on the settlement statement that you received at the closing of your home purchase.
If you pay your real estate taxes through an escrow account, your lender will provide you with a Form 1098 at the end of the year that shows the total amount of real estate taxes you paid. You can use this form to claim your real estate taxes deduction on your tax return.
Finally, if you own a rental property, you may be able to deduct all of your real estate taxes as a business expense. This deduction is claimed on Schedule E of your tax return.
Real estate taxes deductions can help reduce your tax bill, but it is important to keep good records and understand the rules. Be sure to consult with a tax professional if you have any questions about how to claim this deduction or how the rules apply to your specific situation.