What are Real Estate Taxes

Real Estate Taxes, also known as “Property Taxes”, are the annual tax on the value of property and are fully deductible.

Real Estate Tax Deductions lower your tax liability. You can decrease your tax liability further by BOOSTING your Real Estate Tax Deduction for the current year!

Real Estate Tax Definition

This IRS defines “Real Estate Tax” as the annual tax on the value of real property by most state and local governments.

Most state and local governments charge an annual tax on the value of real property. This is called a real estate tax. You may deduct the tax if it is based on the assessed value of the real property and the taxing authority charges a uniform rate on all property in its jurisdiction.

The tax must be for the welfare of the general public and not be a payment for a special privilege granted or services rendered to you.

Deductible Real Estate Taxes

As a homeowner, you are entitled to deduct payments of real estate tax on your property if you claimed itemized deductions on your tax return (you are not allowed to deduct real estate taxes if you claim the standard deduction on your tax return). The IRS allows you to deduct real estate taxes on your main home and any other home you own.

There are no limits on the dollar amount of real estate taxes you can deduct. There are no limits on the number of homes for which you can claim the deduction. The deduction for real estate taxes on your residence and vacation homes is claimed as an itemized deduction (you cannot use this benefit if you claim the standard IRS deduction).

Your payments of state, local, or foreign real estate taxes on your non-business property are deductible. You must have paid them at settlement or closing, or to a tax authority during the year.

Real Estate Taxes included in Mortgage Payment

Your monthly mortgage payment to a bank or other mortgage holder generally includes amounts allocated to real estate taxes. The bank will pay the real estate taxes to the proper taxing authority on their due date. If your real estate taxes are included in your mortgage payment you may claim a deduction only in the tax year you actually pay taxes. You can check the year end statement the lender sends you to determine if they pay the tax collector the same year that you paid taxes to the lender.

Real Estate Taxes Paid at Settlement or Closing

Real estate taxes are generally divided so that you and the seller each pay taxes for the part of the property tax year you owned the home. Your share of these taxes is fully deductible, if you itemize your deductions.

Division of Real Estate Taxes

For federal income tax purposes, the seller is treated as paying the property taxes up to, but not including, the date of sale. You (the buyer) are treated as paying the taxes beginning with the date of sale. This applies regardless of the lien dates under local law. Generally, this information is included on the settlement statement you get at closing.

You and the seller each are considered to have paid your own share of the taxes, even if one or the other paid the entire amount. You each can deduct your own share, if you itemize deductions, for the year the property is sold.

Example: Reuben Villa purchases a home on September 1. The property tax year (the period to which the tax relates) in your area is the calendar year. The tax for the year was $1000 and was due by the seller on August 15.

Reuben owned the home during the year for 122 days (September 1 to December 31, including his date of purchase). Reuben will determine his deduction for real estate taxes on his home as follows:

1. Total Real Estate Taxes for the year $1,000
2. Number of days Reuben owned the property122
3. Divide line 2 by 365 (122 days / 365 days).3342465
4. Reuben's deduction. (Multiply line 1 by line 3)$334.25

Reuben may deduct $334.25 on his tax return for the year if he itemizes his deductions. He is considered to have paid this amount and can deduct it on his return even if, under the contract, he did not have to reimburse the seller.

Prorated Real Estate Taxes

When you purchase your property, you will more than likely have to pay prorated real estate taxes. They are prorated because the IRS treats the seller as paying the real estate taxes up to the date of the sale and treats you as paying the taxes beginning with the date of sale.

Learn about Prorated Property Taxes here.

Delinquent Property Taxes

Delinquent taxes are unpaid taxes that were imposed on the seller for an earlier tax year. If you agree to pay delinquent taxes when you buy your home, you cannot deduct them. You treat them as part of the cost of your home.

Escrow Accounts

Many monthly house payments include an amount place in escrow (put in the care of a third party) for real estate taxes. You may not be able to deduct the total you pay into the escrow account. You can deduct only the real estate taxes that the lender actually paid from escrow to the taxing authority. Your real estate tax bill will show this amount.

Refund or Rebate of Real Estate Taxes

If you receive a refund or rebate of real estate taxes this year for amounts you paid this year, you must reduce your real estate tax deduction by the amount refunded to you. If the refund or rebate was for real estate taxes paid for a prior year, you may have to include some or all of the refund in your income.

Items You Cannot Deduct as Real Estate Taxes

There are several items the IRS will not allow you to deduct as real estate taxes. Charging for services, Transfer Taxes (or Stamp Taxes), Homeowners Association Assessments are among the items you cannot deduct as real estate taxes.

Learn about Non Deductible Real Estate Tax items here.

Boosting your Real Estate Tax Deduction

Can you boost your real estate tax deduction for the current year? The answer is YES! You can boost your real estate tax deduction by prepaying your real estate taxes.

Discover How to Lower Property Taxes by prepaying real estate taxes.

For more information concerning Real Estate Taxes, please refer to IRS Publication 530; Tax Information for Homeowners.