It may seem like one taxing authority or another wants a share from you. The Internal Revenue Service (IRS) allows you to get some of your money back in the form of a property tax deduction for the cost of taxes that you must pay to local taxing authorities.
While the passage of the Tax Cuts and Jobs Act (TCJA) in 2018 imposed a cap on the amount you can deduct, the local property tax deduction is still available to homeowners.
Key Takeaways
- The property tax deduction is available only if you itemize.
- There is a $10,000 cap on how much you can deduct, per the Tax Cuts and Jobs Act.
- You must own the property to qualify for the deduction.
- You can pay directly or through an escrow account with the lender that holds your mortgage.
Rules for the Property Tax Deduction
You can claim a deduction for real property taxes if the tax is uniform—the same rate is applied to all real property in the tax jurisdiction. The revenues raised must benefit the community as a whole or the government. The tax can't be paid in exchange for any special service or privilege that only you would enjoy.
You must own the property to be able to claim the deduction. The tax isn't deductible if you pay your mother's property taxes for her because she is having trouble making ends meet. The tax on her property is not levied on you personally.
You Have To Itemize Your Deductions
You must itemize to take the property tax deduction, and the total of your itemized deductions should be more than the standard deduction you're entitled to claim for your filing status to make this worth your while. Otherwise, you'll be taxed on more income than is necessary, jacking up your tax bill rather than reducing it. Property taxes are claimed on Schedule A.
You might want to prepare your tax return both ways to make sure that itemizing is in your best interest because the TCJA nearly doubled standard deductions from what they were before its enactment. The standard deduction is set at these figures for the 2022 tax year:
- $12,950 for single taxpayers and married taxpayers filing separate returns
- $25,900 for married taxpayers filing jointly and qualifying widow(ers)
- $19,400 for those who qualify to file as head of household
Note
The total of all your itemized deductions—including those for money spent on things like medical expenses, charitable contributions, and mortgage interest—should exceed the amount of your standard deduction to make itemization pay off.
The Tax Cuts and Jobs Act Limit
The TCJA limits the amount of property taxes you can claim. It placed a $10,000 cap on deductions for state, local, and property taxes collectively beginning in 2018. This ceiling applies to any income taxes you pay at the state or local level, as well as property taxes. All these taxes fall under the same umbrella.
Note
You no longer get a $12,000 deduction if you spend $6,000 on state income taxes and $6,000 on property taxes, thanks to the TCJA. You can claim $10,000 of these expenses, but the law effectively forces you to leave $2,000 on the table, unclaimed.
The limit is only $5,000 if you're married but file a separate return, and property taxes for personal foreign real property were eliminated entirely by TCJA.
Property Taxes Paid Through Escrow
You can deduct the property taxes you pay directly to the taxing authority, as well as any paid into an escrow account that is included in your mortgage payments. In the latter case, your mortgage lender pays the taxing authority on your behalf.
Note
You can only deduct the amount that your lender actually pays out for property taxes—the tax assessment—even if you pay more than this into escrow over the course of the year.
When Real Estate Is Sold
Property taxes are usually split between the seller and the buyer when real estate is sold. The IRS provides specific guidance as to how to determine the amount of property taxes allocated to each. The parties would each pay taxes for the portion of the tax year that they owned the home.
Other Charges on Property Tax Bills
Sometimes property tax bills include charges or fees for services or assessments for local benefits. These aren't deductible as property taxes. Transfer or stamp taxes or assessments made by a homeowner's association are also not deductible.
Service charges include water service, trash collection services, and other services performed by the government that are related specifically to your property, not to all local properties.
Assessments for local benefits mean charges on your property tax bill that are for "local benefits that tend to increase the value of your property," according to the IRS. They can include things like street or sidewalk construction, or water and sewer systems. They're not deductible as property taxes because these expenses can increase the value of your property.
Recordkeeping for the Deduction
Keep copies of your property tax statements and any canceled checks or bank statements to show proof of payment. Also, keep any escrow documents from the time the property was purchased or sold because these may show additional payments of property tax that you can also deduct.
Impact on the Alternative Minimum Tax
The property tax deduction is an adjustment item if you're liable for the alternative minimum tax, sometimes referred to as the AMT. Property taxes aren't deductible when calculating the AMT. You must add this deduction back into your taxable income.
Note
Taxpayers who are subject to the AMT will typically find that their property tax deduction results in little or no reduction in their overall federal tax liability.
Year-End Tax Planning Has Changed, Too
Taxpayers used to be able to pre-pay the next installment of their property tax before the end of the year to help boost their itemized deductions in the immediate tax year, but this was eliminated in 2018 with the TCJA. For example, you might have paid your spring property tax installment in December to increase the amount of property tax you paid in the year ending in December and increase the amount of your deduction for that tax year.
Attempts to pre-pay any amount before the TCJA took place prompted the IRS to rule that pre-paid taxes would only be deductible going forward if they had already been assessed by the taxing authority with an official billing statement at the time of payment.
Frequently Asked Questions (FAQs)
What is the maximum property tax deduction?
The maximum deduction allowed for state, local and property taxes combined is $10,000. So if you paid $5,000 in state and local taxes and $10,000 in property taxes, you can deduct $5,000 of the property taxes. If you paid $1,000 in state and local taxes and $10,000 in property taxes, $9,000 of the taxes would be deductible.
Can you get a property tax deduction on a second or third property?
You can claim a tax deduction for a second or third property as long as you live there for at least 14 days out of the year and it is not rented out longer than that. However, the total amount of deductions for state, local and property taxes still cannot exceed $10,000, including the tax on your primary residence. The second property must also meet all the qualifications of being considered a second residence.
