What’s yours is mine and mine is… Uncle Sam’s?!
One of the ultimate goals in society today is to eventually own something. Unfortunately, the whole American Dream notion tends to be accompanied by a few undesirables; one of which is property taxes. Depending on your budgeting skills and your own aspirations, you could end up paying taxes on one or any of the following:
- Vacation home
- Rental property
The list goes on and on. With the end goal in mind, we might fully realize all of the additional expenses that come along with it. One of which is property taxes. Ringing any bells? If so, we’ve got some good news for you. Although you can’t technically nix paying taxes on your property altogether, Uncle Sam does allow you a tax deduction if you qualify.
Which property taxes qualify for the write off?
1. Real estate taxes
Real estate taxes are typically related to mortgages and can be deducted if they are charged by the state, local or foreign government. In order to claim the deduction, the amount you report needs to be based on the real estate value of the property in the year of the tax return you are filing. This will be re-assessed annually. The deduction does not include improvements or services that come along with the property.
Let’s take a look at your home, for example:
You just received your property tax bill and see the following breakdown of charges:
Weekly Trash Removal: $70
Sewage Maintenance: $50
Water Use: $45
Property Tax Fee: $850
You would only be able to claim a tax deduction on the $850 Property Tax Fee.
2. Personal property taxes
Personal property taxes are only deductible if charged by the state or local government. To claim the deduction the property must be appraised each year and can only be based on the value of the property.
Let’s consider your boat, for example:
You receive a bill from the state for your boat. The total is $175. This includes an annual boat fee of $75 plus 0.6% of your boat’s value. You can only deduct $100 on your tax return since that is the portion based on your boat’s [property] value.
Have an escrow account? Read the fine print.
It is common to set up an escrow account when you invest in property. This means that you have a third party holding (and essentially saving) your money that will pay for property taxes and insurance premiums throughout your term.
This type of account tends to cause confusion when it comes to deducting your property taxes. As with any tax deduction, expenses are only deductible in the year that they are actually paid. This means that you cannot deduct the amount that you add to your escrow account each year. You will only deduct the amount taken out of your escrow account to pay your property taxes to the taxing authority for that year you’re filing a tax return for.
How to claim the property tax deduction on your tax return
Here’s the final catch when it comes to claiming property taxes on your return. Instead of claiming the usual standard deduction, you will need to itemize. Not to throw IRS lingo into the mix, but this means that you will need to file a Schedule A (Form 1040).
Your real estate taxes are reported on line 6 of Schedule A and your personal property taxes are reported on line 7. Tax payments work in conjunction with your other itemized deductions and are subtracted from your taxable income thus can potentially increase your refund or decrease your amount owed to the IRS. Of course, if you decide to file with a tax preparer, chances are this form won’t even cross your mind.
All in all, you’ll want to make sure that it makes sense for you to itemize instead of taking the standard deduction. If you choose to itemize, remember to have your receipts ready!
Don’t let property taxes deter you from owning something in the future.
Sometimes it can feel like owning property can leave a pretty large dent in your wallet. Take advantage of the tax breaks offered by the IRS and don’t hesitate to ask for help. New and old owners, alike, get confused with all of the tax rules and regulations. RapidTax can help you better grasp what you need to know for your specific situation. We offer free phone and livechat support. Give us a call so that we can help you claim you property tax deduction this year.Wednesday, May 3rd, 2017 at 11:09 am and is filed under Tax Deductions and Credits | Blog.