Nobody likes paying taxes on real estate, especially if you live in a high-tax area of the United States. One silver lining is that you can potentially get a nice tax deduction for the real estate property taxes you pay.
However, like most of the U.S. tax code, the real estate tax deduction is complex -- especially since the Tax Cuts and Jobs Act. Here’s what you need to know about the current state of the real estate tax deduction and how to determine whether you can use it or not.
Real estate taxes are still deductible
First, the good news. Real estate taxes are still deductible on your tax return. This includes taxes that you pay for ownership of your primary residence, a vacation home, and undeveloped land. It doesn't include property taxes on any investment properties you own, although that's generally deductible in another way, which we’ll get into later.
One important point is that real estate taxes are deductible in the year they’re paid, not the year when they’re assessed. If you get your 2019 real estate property tax bill in October and don’t pay it until Jan. 2020, any real estate tax deduction would occur on your 2020 tax return, even though the taxes were billed in 2019.
Also keep this in mind if you pay your taxes in two or more installments. Your taxes are paid when the money is actually 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
Here’s the first thing you need to know about real estate tax deductions. To deduct real estate taxes, or any other type of personal property taxes, you need to itemize deductions on your tax return.
When you fill out your tax return, you have two main choices when it comes to deductions. You can itemize deductions, which means you list each deduction to which you’re entitled and subtract them from your taxable income. Or you can choose to take the standard deduction and use it to lower your taxable income instead. You can use whichever is most beneficial to you.
What this means is that if your itemizable deductions are more than the standard deduction, it’s worth itemizing. If not, you’re better off with the standard deduction. The Tax Cuts and Jobs Act dramatically increased the standard deduction, so itemizing isn’t worthwhile for most Americans.
Here’s a quick way to estimate if you’ll be able to itemize. First, add up any of these itemized deductions you're entitled to:
- Mortgage interest on as much as $750,000 in principal.
- Medical expenses that exceed 10% of your adjusted gross income (AGI).
- Charitable contributions.
- State and local income and property taxes up to$10,000 (this includes your real estate taxes -- more on this in the next section).
Then, compare the total to your applicable standard deduction. Here are the standard deductions for the various tax filing statuses in 2019 (that's the federal income tax return you'll file in 2020):