Homeowners can deduct property taxes for their primary residence and any other properties they own. Whether you’ve recently purchased a home, or it has been gifted to you, we’re here to answer all of your questions about the basics of property taxes.
Can you deduct property taxes?
Yes, you can deduct property taxes on your federal income tax return, but there are some details to keep in mind. The real estate or property tax deduction allows you to deduct up to $10,000 (or $5,000 if married filing separately) of state and local taxes paid on both real and personal property. To claim this tax break, you’ll need to itemize deductions on your federal income tax return.
Personal property tax, or excise tax, is imposed on items such as vehicles, collectibles, and business equipment. Real property includes land, buildings, and any improvements on the land, such as a house. This deduction is most commonly associated with property taxes paid on primary residences, vacation homes, and rental properties.
Property tax deduction limit for 2024-2025
The maximum deduction allowed for state and local income taxes, which includes property taxes, is capped at $10,000 annually.
Which property taxes are tax deductible?
Property taxes are the annual fees that property owners pay based on the value of their property. This tax is usually levied by state or local government to fund local community services such as school districts, fire and police departments, libraries, and road construction and repair.
Property taxes include real estate taxes and personal property taxes. Real estate tax typically refers to the tax you pay on residential property,while personal property tax includes items not attached to real estate, such as cars, boats, RVs, or mobile homes.
In most cases, you can deduct property taxes on your federal income tax return, but there are some exceptions.If you use the property for a business, you can only deduct the part of the tax that relates to the business. Also, if your total state and local taxes exceed $10,000, your ability to deduct property taxes may be limited because of a deduction cap.
Your property tax bill is calculated based on the fair market value of the home or property and the municipality’s tax rate. The tax rate, usually between 0.40% – 1.50%, is determined by the state’s Department of Revenue.
Can I claim real estate tax deductions with shared ownership?
Yes, but the deduction must reflect the ownership breakdown. If multiple people own the property, the total property taxes paid on the property can be split, but the overall amount can only be claimed once.
For example, if a tenancy in common agreement for a property states that three owners have 40%, 35%, and 25% of ownership, they can only deduct that same percentage of property taxes paid. In other words, Owner A can only deduct 40% of the property taxes paid, Owner B can deduct 35%, and Owner C can deduct 25%. The only exception is if the tenancy in common agreement also specifically outlines a different breakdown in property tax responsibilities than the ownership portion.
If you gifted property to a family member, this contribution isn’t tax deductible. Only qualified charitable donations may be tax deductible. You can’t claim the property as a loss for the tax year during which you gifted the property, even if you sold the property for less than its value.
Shared ownership: Joint tenancy vs. tenancy in common
When multiple people purchase a property, there are two primary structures for sharing ownership: joint tenancy and tenancy in common. There are several factors that make these two different. The main difference is how the ownership is split.
- Joint tenancy is an agreement where all parties own an equal share of the property.
- Tenancy in common agreements can specify different percentages of ownership to each partner.
If you’re the single owner of a property and add a family member to a deed as a joint owner, you’ll each own 50% of the property. For tax purposes, the ownership stake is considered a gift of 50% of the property’s fair market value. If the gift exceeds the annual exclusion limit of $18,000 (for tax year 2024), the donor must file a gift tax return using Form 709.
If you add a family member to the deed with a tenancy in common agreement, the value of the gift is equivalent to their percentage of ownership in the fair market value. For example, if you grant them 20% ownership in a property valued at $100,000, for tax purposes, you’ve gifted them $20,000.
Another important distinction between joint tenancy and tenancy in common is how the death of an owner impacts ownership.
- Joint tenancy agreements redistribute the deceased owner’s shares to the remaining owners.
- Tenancy in common agreements allow the deceased owner’s shares to be passed down to their heir(s).
The last significant difference lies in the conditions required to sell or transfer shares.
- Joint tenancy agreements restrict an owner from selling or transferring their shares without the consent of all other owners.
- Tenancy in common agreements allows each owner to transfer their share of ownership without needing approval from the other owners.
How to claim property tax deductions
When claiming property tax deductions, you’ll need to gather your property tax records. This includes the property tax bill or any statement from your local tax authority that shows the amount paid during the tax year.
When you file your tax return, you’ll use Schedule A (Form 1040), which is the form for itemizing deductions. On Schedule A, you’ll list the total amount of property taxes you paid on your primary residence and any other properties you own.
