Property Tax Deduction

What it is

State and local real estate taxes that are levied for the general public welfare can be deducted from federal income taxes if the taxpayer itemizes deductions. Deductible real property taxes include assessments on a primary residence, vacation home, land, or certain foreign property. Taxes charged for specific services (trash collection) or improvements (sidewalks, local improvement assessments) are not deductible.

Key points

• Deduction available only if you itemize deductions on your federal return.
• Only property taxes based on the assessed value of real property and charged on an annual basis qualify.
• Taxes on rental or commercial property, and taxes on property you do not own, are not deductible.
• Delinquent taxes from prior years paid by a buyer at closing are treated as part of the home’s purchase cost—not an immediate deduction.
• Form 1098 (mortgage interest statement) and year-end tax statements from your county or municipality help determine deductible amounts.

Limits introduced by tax reform

The Tax Cuts and Jobs Act (TCJA) capped the combined deduction for state and local taxes (including property taxes) at $10,000 per return ($5,000 if married filing separately), effective for tax years beginning in 2018. The TCJA also reduced the mortgage interest deduction cap for new loans to interest on up to $750,000 of mortgage debt (with grandfathering rules for older loans). At the same time, the standard deduction roughly doubled, so fewer taxpayers now benefit from itemizing.

How to claim the deduction

1. Itemize deductions on Schedule A of your federal return rather than taking the standard deduction.
2. Include only annual property taxes based on the property’s assessed value. Taxes charged solely at purchase (a one-time charge) do not qualify.
3. Subtract any non-deductible portions of your bill (service fees, improvements, special assessments).
4. Keep documentation: tax bills, settlement statements from closing, and any Form 1098 provided by your lender.

Pros and cons

Pros
* Lowers taxable income for homeowners who itemize.
* Considered by supporters to encourage homeownership.

Cons
* Cap on state and local tax deductions limits benefits for taxpayers in high-tax areas.
* Critics argue the deduction favors homeowners over renters and can encourage larger mortgages.
* Fewer taxpayers itemize due to the higher standard deduction, reducing the number who claim the property tax deduction.

Practical takeaways

• Compare the total of your eligible itemized deductions with the standard deduction each year to determine which is better for you.
• Review your property tax bill carefully and keep supporting documents (tax statements, closing statements, Form 1098).
• If you have questions about eligibility, allocation of payments at closing, or how the SALT cap affects you, consult a tax professional.