Are Property Taxes Tax Deductible?
- Before considering whether your property taxes are tax deductible, it is useful to have a basic understand of how a tax deduction works. Tax deductions are specific dollar or percentage allowances granted to taxpayers by the IRS. Taking a tax deduction on your annual tax return reduces your gross adjusted income and establishes what is known as your taxable income. If you get a property tax deduction, your taxable income amount is lower. This makes your tax obligation lower as well, since you are taxed on a lesser income amount.
- Most homeowners are required to pay local, state or foreign government property taxes. Some pay taxes directly to the taxing authority, while many homeowners pay property taxes in monthly installments to escrow accounts maintained by their mortgage lenders. The mortgage lender pays out property taxes annually, semiannually or when due. For your property tax payments to serve as a tax deduction, the IRS requires that the taxes are charged "uniformly" for all property owners in your taxing jurisdiction. Deductible property taxes are also based on your property's tax-assessed value.
- Some states or local jurisdictions charge homeowners property taxes for owned personal property. This is common with major property items like boats and cars. If you live in a state where you pay personal property taxes yearly, regardless of how often tax payments are made during the year, the IRS indicates you can deduct these taxes on your tax return. Some car owners do not pay property taxes, but pay annual vehicle registration renewal fees. These fees are also typically tax deductible.
- In its "Topic 503 Deductible Taxes" discussion, the IRS notes that when states or counties charge "local benefit taxes," which are used specifically for improvements to local properties, streets and sidewalks, a deduction is not allowed. You are allowed to increase your property's cost basis by the assessment amount. You are able to deduct these taxes if the money is used for maintenance and repair as opposed to improvements or upgrades.