If you pay taxes on your personal property and owned real estate, they may be deductible from your federal income tax bill. Most state and local tax authorities calculate property taxes based on the value of the homes located within their areas, and some agencies also tax personal property. If you pay either type of property tax, claiming the tax deduction is a simple matter of itemizing your personal deductions on Schedule A of Form 1040.
Personal property taxes
Some states, cities and counties assess personal property taxes on various types of property you own that produce income, such as tools and other equipment. Every local district has its own list of what type of personal property is taxed and specifies how taxpayers should determine the item's taxable value.
For example, Miami-Dade County in Florida requires taxpayers to use the fair market value of the property as the taxable value.
Real property taxes
Homeowners who itemize their tax returns can deduct property taxes they pay on their main residence and any other real estate they own. This includes property taxes you pay starting from the date you purchase the property. The official sale date is typically listed on the settlement statement you get at closing.
However, if you agree to pay the seller's delinquent taxes from an earlier year at the time you close the sale, you are not permitted to deduct them on your tax return. This payment must be treated as part of the cost of buying the home, rather than as a property tax deduction.
Non-deductible real property charges
Certain items on your real estate property tax bill may look like taxes but are actually miscellaneous charges that are not deductible. These include:
- Fees for the delivery of a service, such as water, or trash collection
- Flat fees to satisfy fines, such as a charge to mow your lawn that wasn't compliant with local law
- Assessments for local benefits, such as a charge to construct a sidewalk outside your house
You can deduct costs of maintenance and repairs, however, only if the tax authority itemizes these amounts in your bill.
Taxes paid through escrow accounts
If you pay your real property taxes by depositing money into an escrow account every month as part of your mortgage payment, make sure you don't treat the entire payment as a property tax deduction.
Only the amount that the bank or lender forwards to the Internal Revenue Service (IRS), often noted on Form 1098, qualifies for the deduction. That’s because, the amount you must pay to an escrow account is adjusted yearly to be as close as possible to the precise amount due, but it’s never exactly the same amount.
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