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A Complete Guide to Real Estate Tax Deductions

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A Complete Guide to Real Estate Tax Deductions

Published 01/24/2020

Nobody likes paying taxes on real estate, especially if you live in an area with high tax rates. However, you can potentially get a nice tax deduction from the real estate property taxes you paid. As most of the U.S. tax code, the real estate tax deduction is complicated especially since the Tax Cuts and Jobs Act . The following information is what you should know about the present condition of the real estate tax deduction and how to determine if you can utilize it or not.

Real estate taxes are still deductible

Real estate taxes are still deductible on your tax return, and that includes the taxes that you pay for ownership of your primary residence, a vacation home, and undeveloped land. However, it does not include property taxes on any investment properties you own. One significant point is that property taxes are deductible in the year they're paid, not the year when they're charged. Even if you get your 2019 real estate property tax bill in December, and do not pay it until January the following year, any real estate tax deduction would occur on the following year’s tax return. You should also be aware that if you pay your taxes in two or more installments. Your taxes are paid when the money is sent to your local government, not in the tax year when you paid the money into your escrow account as part of your mortgage payment.

You’ll need to itemize deductions to use it

The first thing you need to know about real estate tax deductions is how to utilize itemize deductions. To deduct any type of personal property taxes, you need to itemize deductions on your tax return. When you complete your tax return you can use whichever is most beneficial to you, though there are only two options when it comes to deductions. You can itemize deductions, which is when you list each deduction to which you’re entitled and subtract them from your taxable wages. On the other hand, you can decide to take the standard deduction and use it to lower your taxable income instead. This means if your itemizable deductions are more than the standard deduction, it justifies your reason to itemize. If not, you should consider filing with standard deductions. The Tax Cuts and Jobs Act significantly expanded the standard deduction, so itemizing is not beneficial for most Americans.

Here's a fast method to assess if you’ll be able to itemize. Add the total of any itemized deductions you're qualified for:

- Mortgage interest t on as much as $750,000 in principal.
- Medical costs that surpass 10% of your balanced gross pay (AGI).
- Charitable commitments.
- State and neighborhood pay and property charges up to $10,000 (this incorporates your real estate property taxes).

At that point, differentiate the sum with your applicable standard deduction. Here are the standard deductions for the various expense tax filing statuses in 2019 (that's the federal income tax return you'll file the following year):


The SALT deduction summary

The deduction for state and local taxes, otherwise called the SALT deduction, is one of the most mainstream itemizable deductions on tax returns nationwide. Before the acceptance of the Tax Cuts and Jobs Act, it was the most broadly utilized deduction by Americans regarding the dollar amount. Here are two main points that are included in SALT deductions: State and local income taxes or state and local sales taxes, and state and local property taxes, including real estate taxes and taxes assessed on other personal property, such as automobiles.

The most significant change made by the new tax law is that the whole deduction is topped at $10,000 per return ($5,000 for married filing separately). In other words, in the event that you paid $6,000 in property charges and $8,000 in state income taxes for 2019, your SALT deduction is $10,000, not the $14,000 you paid for those costs.

Two real estate tax deduction examples

To begin, let’s say you’re married and that your taxable income before deductions is $100,000 for 2019. Envision that you paid $10,000 in mortgage interest, donated $4,000 to charity, paid $8,000 in state income taxes, and paid $10,000 in real estate taxes. Because the SALT deduction is capped at $10,000, your total itemizable deduction would be $22,000. Since your standard deduction is $32,400, itemizing would not be worthwhile for you, and you wouldn’t deduct your real estate taxes for 2019.

On the other hand, let’s say you’re married with $100,000 of taxable income. For this example, you: paid $12,000 in mortgage interest, gave $6,000 to charity, paid $8,000 in deductible medical expenses, paid $8,000 in state income taxes, and paid $8,000 in real estate taxes. This would give you a total of $36,000 in itemizable deductions. Since this amount surpasses your standard deduction, you could deduct your real estate taxes as part of your $10,000 SALT deduction for 2019.

Investment property real estate taxes are a different story

If you own any investment properties and pay taxes on them, the real estate tax deduction operates a bit differently. Rather than deducting it on your personal tax return as an itemized deduction, you can utilize the property taxes you pay to compensate for the rental revenue your property produces, much like any other operating expense.

For instance, suppose you have an investment property that produces $2,000 every month in rent, so $24,000 every year. You pay $6,000 in real estate taxes, $8,000 in mortgage interest and $2,000 in other working expenses. You can subtract the $16,000 in expenses to bring your taxable rental income down to $8,000. You would then be able to utilize your depreciation deduction to decrease it significantly further. Though, this is not liable to the $10,000 SALT limitation. In the event that you own a portfolio of rental properties, you can utilize all the real estate taxes you pay for them to help diminish your taxable rental income.

2025 is the key year

The property tax deduction rules addressed here, specifically the SALT limit and the standard deduction amounts, were a consequence of the Tax Cuts and Jobs Act, which went in late 2017 and became effective for the 2018 tax year. Like most other provisions of this legislation that affect individual taxpayers, these laws are set to expire after the 2025 tax year. Unless Congress chooses to lengthen the changes, the $10,000 SALT deduction limit will go away and the standard deduction would be sliced in half to start the 2026 tax year. Also, contingent upon the result of the 2020 political race, the SALT finding could be altered sooner.

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