Are Property Taxes on Your Home Deductible?
In the interest of encouraging home ownership, federal laws grant taxpayers a deduction of property taxes paid from their gross income when figuring taxable net income. Although subject to conditions and restrictions, the property tax deduction still affords helpful financial assistance to homeowners, many of whom are subject to property taxes as well as income and sales taxes in their state. The deduction is strongly supported by the public and will in all likelihood be maintained by the Internal Revenue Service in the future.
Dating and Record Keeping
To be deductible, the tax must be imposed on you and must have been paid during the tax year for which you are claiming the deduction. You must obtain copies of your tax assessments, as well as records of payment, and keep them in case of an IRS audit of your tax return.
Restrictions
Any state, local or foreign taxes on your property are deductible, as long as the same tax is levied on all other property in the community. There is no limit on the amount of the deduction, although it is not available to taxpayers subject to the Alternative Minimum Tax (AMT). The tax must have been based on the assessed value of your property, and it must have been levied and paid during the tax year for which you are claiming the deduction.
Escrow Accounts
The mortgage lender who pays property taxes out of an escrow account can provide a full accounting of when the tax was paid and in what amount. The portion of your monthly payment that goes into the property tax escrow account is not deductible. Only the payout by the lender to the taxing authority is deductible, and only in the year it was made. In addition, property taxes assessed but not paid by the seller of your home, and which were rolled into the final closing price, are also deductible.
Assessments and Fees
Unless they are used for maintenance or repair, assessments charged to your property for municipal improvements, such as new sewer or water lines, are not normally deductible, though they are in effect a local property tax. In addition, regular fees charged to owners, such as homeowner's association dues, are not deductible.
Non-Itemized Returns
The property tax deduction must be itemized on Schedule A of the federal 1040 tax return. Normally, taxpayers who take a standard deduction, rather than itemizing, may not deduct property taxes from their income. However, Congress passed an amendment effective in 2008 that allows those who do not itemize to take a property tax deduction of up to $500 if they file as single and up to $1,000 if they are married couples filing joint returns.
California Homeowner Assistance
For fiscal year 2007, California passed a Homeowner Assistance Program, which allowed one-time payments to qualified homeowners that represent a partial refund of their local property taxes. However, the state's ongoing budget crisis persuaded legislators to defund this program for 2008 and 2009, and future funding for homeowner assistance is doubtful.
