What Does Property Tax Deduction Mean?

Property tax deduction refers to state and local property taxes that are generally deductible from federal income taxes. These include real estate taxes, which include any state, local, or foreign taxes that are imposed for the welfare of the general public. Deductible real estate taxes generally do not include taxes charged for home renovations or for services like trash collection.


Tax Deductions Vs. Tax Credits

Property Tax Deduction Explained

The owner of a property must pay taxes, assessed annually by a state and/or local government, on the value of the property. A property owner can claim a tax deduction on some or all of the property taxes paid if they use the property for personal use and itemizes deductions on their federal tax return. The real estate tax that can be deducted includes taxes paid at closing when buying or selling a home and taxes paid to a county or town’s tax assessor on the assessed value of the personal property. Personal property, according to the Internal Revenue Service (IRS), may include a taxpayer’s main home, vacation home, land, or foreign property.

Taxes paid on rental or commercial property and property not owned by the taxpayer cannot be deducted. In addition, a homebuyer who pays the seller's delinquent taxes from an earlier year at the time the sale was closed cannot deduct the taxes on their tax return. This delinquent tax payment is, instead, treated as part of the cost of buying the home, rather than as a property tax deduction. Also, a property owner’s tax bill includes miscellaneous items that are not allowed to be deducted for tax purposes. Some of these items include payments for improvements made to a local residential area, such as sidewalks, and fees for a service delivery, such as trash collection. To understand what portion of a tax bill qualifies for deduction, refer to Form 1098, which is reported by the bank or lender to the IRS and also sent to the property owner.

To claim a property tax deduction, the tax must only apply to the value of the personal property owned and be charged on an annual basis, irrespective of when the government collects it from you. Therefore, if the state tax was only charged at the time the property was purchased then it does not meet the IRS definition of a deductible personal property tax.

As stated earlier, property tax can only be deducted if the owner is eligible to itemize his or her deductions. A taxpayer can itemize deductions if the sum of all his eligible itemized expenses is greater than the standard deduction allowed in a given tax year.

From time to time there is talk of eliminating the property tax deduction. One of the arguments for doing so is that the deduction, along with federal mortgage interest deduction, discriminates against renters and encourages people to take on more debt. Proponents of retaining the property tax deduction say that it promotes homeownership. Prior to 2018, a homeowner could deduct on Schedule A the real estate property taxes paid, without limit. In December 2017, President Donald Trump signed the Republican tax bill into law, changing the deduction for state and local property taxes effective 2018. Under this new law, state and local taxes, including property taxes, can be deducted up to $10,000 combined. Furthermore, homeowners who deduct mortgage interest are limited to the amount they pay on $750,000 worth of debt, down from $1 million. Since the standard deduction doubled in 2018, it is likely that fewer homeowners will itemize their deductions. Thus, fewer property owners will claim the property tax deduction.