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Can Property Taxes Be Deducted?

Can Property Taxes Be Deducted?

Property taxes increase housing costs, as local municipalities must raise revenue to provide neighborhood services. Property tax deductions, however, reduce your total tax burden. The paperwork required to take advantage of the property tax deductions varies between individual homeowners and private businesses. Learn the tax law basics, so that you may improve your real estate returns and overall bottom line.

Benefits of Property Taxes

Property taxes are necessary for the functioning of municipal government, but utilizing property tax deductions lowers homeowners' costs and increases real estate demand. Tax deductions are designed to improve consumer buying power, which translates into jobs creation and economic vitality.

How Property Tax Works

Property taxes are paid at the local level to finance area services, such as police units, community parkland and public schools. Municipal treasury officials apply mathematical calculations to asses property values used to calculate your tax bill. Tax assessments begin with comparable, or comp, sales data of neighborhood real estate to estimate fair market value. Property taxes may increase over time, as the real estate market strengthens and improvements to individual homes enhance their value. Some states have enacted legislation that protects homeowners from significant property tax increases. In California, Proposition 13 specifies that property taxes cannot exceed 1 percent of your home's market value, and the California Constitution limits annual property tax increases to 2 percent for existing homeowners. For tax purposes, property values are reassessed when real estate is sold, which often translates into higher taxes for new owners.

Property Tax Features

At tax season, borrowers that pay property taxes through their mortgage escrow accounts receive IRS Form 1098 as documentation. If you make property tax payments directly to the local government, review your records to obtain the amount paid for that tax year. Tax filers first complete Schedule A to itemize property taxes paid on their primary residence and vacation homes. The total amount of taxes paid is then subtracted from taxable income on IRS Form 1040. For housing investments, sole proprietors and partners complete Schedule E to deduct property taxes from real estate income, which is taxable income on Form 1040. Corporate entities that purchase real estate use IRS Form 1120 to deduct property taxes from business income.

Property Tax Considerations

Some states permit homeowners to deduct property taxes from the amount owed for state taxes. As of 2010, the California Franchise Tax Board permits California residents to file Schedule CA to include the full property tax deduction. Alternatively, Illinois homeowners may take 5 percent of the property taxes paid on a primary residence as a tax credit. Tax credits reduce taxes on a dollar-for-dollar basis.


Federal personal income tax law enables you to either take the standard deduction, or itemize each individual deduction. For the 2010 tax year, standard deductions are $5,700 and $11,400 for single filers and married couples, respectively. Only take the property tax deduction when total itemized deductions surpass your standard deduction.

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