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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):
|Tax Filing Status||2019 Standard Deduction|
|Married filing jointly||$24,400|
|Head of household||$18,350|
|Married filing separately||$12,200|
The SALT deduction in a nutshell
I mentioned in the previous section that state and local property taxes are deductible, but only to a maximum of $10,000. Let’s expand on that.
The deduction for state and local taxes, also known as the SALT deduction, is one of the most popular itemizable deductions on U.S. tax returns. In fact, before the passage of the Tax Cuts and Jobs Act, it was the most widely-used deduction by Americans in terms of dollar value. In a nutshell, the SALT deduction includes the following:
- State and local property taxes, including real estate taxes and taxes assessed on other personal property, such as automobiles.
- State and local income taxes or state and local sales taxes.
The major change made by the new tax law is that the entire deduction is capped at $10,000 per return ($5,000 for married filing separately). In other words, if you paid $6,000 in property taxes and $8,000 in state income taxes for 2019, your SALT deduction is $10,000, not the $14,000 you actually paid for those expenses.
Two real estate tax deduction examples
Here are two quick examples of how the real estate tax deduction works in the real world.
First, let’s say you’re married and that your taxable income before deductions is $100,000 for 2019. Imagine that you:
- paid $7,000 in mortgage interest,
- donated $2,000 to charity,
- paid $7,000 in state income taxes, and
- paid $6,000 in real estate taxes.
Because the SALT deduction is limited to $10,000, your total itemizable deduction would be $19,000. Since your standard deduction is $24,400, itemizing wouldn’t 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 $11,000 in mortgage interest,
- gave $4,000 to charity,
- paid $5,000 in deductible medical expenses,
- paid $7,000 in state income taxes, and
- paid $6,000 in real estate taxes.
This would give you a total of $30,000 in itemizable deductions. Since this exceeds 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 works a little differently. Instead of deducting it on your tax return as an itemized deduction, you can use the property taxes you pay to offset the rental income your property generates, just like any other operating expense.
For example, let’s say you have a rental property that generates $1,000 per month in rent, so $12,000 per year. You pay $3,000 in real estate tax, $5,000 in mortgage interest, and $1,000 in other operating costs. You can subtract the $9,000 in expenses to bring your taxable rental income down to $3,000. You can then use your depreciation deduction to reduce it even further.
This isn’t subject to the $10,000 SALT limitation. If you own a portfolio of rental properties, you can use all the real estate taxes you pay for them to help reduce your taxable rental income.
2025 is the key year
The property tax deduction rules discussed here, specifically the SALT limit and the standard deduction amounts, were a result of the Tax Cuts and Jobs Act, which passed in late 2017 and went into effect for the 2018 tax year.
Like most other provisions of this legislation that affect individual taxpayers, these rules are currently scheduled to disappear after the 2025 tax year. This means that, unless Congress decides to extend the changes, the $10,000 SALT deduction limit will go away and the standard deduction would be roughly cut in half beginning with the 2026 tax year. Additionally, depending on the outcome of the 2020 election, the SALT deduction could be modified sooner.
The point is that this discussion pertains to the real estate tax deduction as it stands today. Tax law changes over time and has become an especially fluid concept over the past few years, so the rules could be different in the future.
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