How to Take Advantage of Real Estate Tax Deductions

3 Min Read

By Isaiah Ajala, Licensed Real Estate Salesperson

Real estate taxes are one of the major expenses of owning a property. However, the good news is that you may be able to deduct a portion of your real estate taxes on your tax return. In this blog article, we will discuss real estate taxes deductions and how you can take advantage of them.

What are Real Estate Taxes?
Real estate taxes are assessed on the value of your property by your local government, used to fund local services such as schools, police and fire departments, and road maintenance. The taxes are usually collected annually or semi-annually.

Deducting Real Estate Taxes

If you own a home or investment property, you can deduct a portion of your real estate taxes on your federal income tax return. To claim this deduction, you will need to itemize your deductions on Schedule A of your tax return. The amount of your deduction depends on the total amount of property taxes paid during the year. 

It is important to note that there is a limit on the amount of real estate taxes you can deduct. The Tax Cuts and Jobs Act of 2017 limited the total amount of state and local taxes, including property taxes, that you can deduct on your federal tax return to $10,000. This limit applies to both single and married taxpayers.

Types of deductions

1. Property Tax Deduction: The most common real estate tax deduction is the property tax deduction. This deduction allows you to deduct the amount you paid in property taxes on your home or other real estate from your taxable income. 

2. Mortgage Interest Deduction: This deduction allows you to deduct the interest you paid on your mortgage from your taxable income. 

3. Home Equity Loan Interest Deduction: If you have a home equity loan or line of credit, you may also be able to deduct the interest you paid on that loan from your taxable income. 

4. Points Deduction: When you take out a mortgage, you may have to pay "points" to the lender, which are fees that are paid upfront to reduce the interest rate on your mortgage. 

5. Energy Efficiency Deductions: If you made certain energy-efficient improvements to your home, such as installing solar panels or energy-efficient windows, you may be able to claim a tax credit for those improvements. 

6. Rental Property Deductions: If you own rental property, you can also claim various deductions on your tax return, such as deductions for property taxes, mortgage interest, repairs, and depreciation. 

Other Considerations

If you are a new homeowner, you may be able to deduct any prorated real estate taxes that were paid by the previous owner.  If you pay your real estate taxes through an escrow account, your lender will provide you with a Form 1098 at the end of the year that shows the total amount of real estate taxes you paid. You can use this form to claim your real estate taxes deduction on your tax return. If you own a rental property, you may be able to deduct all of your real estate taxes as a business expense. This deduction is claimed on Schedule E of your tax return.

Real estate taxes deductions can help reduce your tax bill, but it is important to keep good records and understand the rules. Be sure to consult with a tax professional if you have any questions about how to claim this deduction or how the rules apply to your specific situation

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