Property Tax Deduction Strategies Under the New Tax Law

The Property Tax Deduction

Image shows property tax deduction rules. You have to itemize it. You must be the property owner to claim the deduction. The total of all your itemized deductions should exceed the amount of your standard deduction to make claiming the property tax deduction worth it. The TCJA also limits the amount of property taxes you can claim.

Image by Nusha Ashjaee © The Balance 2020

It can sometimes seem like one taxing authority or another always has its hand out for your money. Your state will ask for a share if the federal government doesn't get you, and even local and county governments can get into the act, assessing taxes on property you own. Fortunately, the IRS allows you to take a property tax deduction for the cost of taxes that you must pay to local taxing authorities.

The rules changed somewhat with the passage of the Tax Cuts and Jobs Act (TCJA) in 2018, but the property tax deduction is still available.

Rules for the Property Tax Deduction

You can claim a deduction for real property taxes if the tax is uniform—the same rate is applied to all real property in the tax jurisdiction. The revenues raised must benefit the community as a whole or the government. The tax can't be paid in exchanged for any special service or privilege that only you would enjoy.

You must own the property to be able to claim the deduction. The tax isn't deductible if you pay your mother's property taxes for her because she's getting up in years and is having a hard time making ends meet, because that tax isn't levied on you personally. 

You Have to Itemize Your Deductions

You must itemize to take the property tax deduction, and the total of your itemized deductions should be more than the standard deduction you're entitled to claim for your filing status to make this worth your while. Otherwise, you'll be taxed on more income than is necessary, jacking up your tax bill rather than reducing it. Property taxes are claimed on Schedule A.

You might want to prepare your tax return both ways to make sure that itemizing is in your best interest, because the TCJA nearly doubled standard deductions from what they were in 2017. They're set at these figures for the 2021 tax year:

  • $12,550 for single taxpayers and married taxpayers filing separate returns
  • $25,100 for married taxpayers filing jointly and qualifying widow(ers)
  • $18,800 for those who qualify to file as head of household

The total of all your itemized deductions—including those for money spent on things like medical expenses, charitable contributions, and mortgage interest—should exceed the amount of your standard deduction.

The Tax Cuts and Jobs Act Limit

The TCJA limits the amount of property taxes you can claim. It places a $10,000 cap on state, local, and property taxes collectively beginning in 2018. This ceiling applies to income taxes you pay at the state and possibly local level, as well as property taxes. All these taxes fall under the same umbrella.

You no longer get a $12,000 deduction if you spend $6,000 on state income taxes and $6,000 on property taxes, thanks to the TCJA. You can claim $10,000 of these expenses, but the law effectively forces you to leave $2,000 on the table, unclaimed.

The limit is only $5,000 if you're married but file a separate return, and property taxes for personal foreign real property have been eliminated entirely.

Property Taxes Paid Through Escrow

You can deduct property tax payments that you make directly to the taxing authority, as well as payments made into an escrow account that are included in your mortgage payments. Your mortgage lender would remit payment to the taxing authority on your behalf in this case.

You can only deduct the amount that your lender actually pays out for property taxes—the tax assessment—even if you pay more than this into escrow over the course of the year. 

When Real Estate Is Sold

Property taxes are usually split between the seller and the buyer when real estate is sold. The IRS provides specific guidance as to how to determine the amount of property taxes allocated to each. Each would pay taxes for the portion of the tax year that they owned the home.

Other Charges on Property Tax Bills 

Sometimes property tax bills include charges or fees for services or assessments for local benefits. These aren't deductible as property taxes. Transfer or stamp taxes or assessments made by a homeowner's association are also not deductible.

Service charges include water service, trash collection services, and other services performed by the government that are related specifically to your property, not to all local properties.

Assessments for local benefits mean charges on your property tax bill that are for "local benefits that tend to increase the value of your property," according to the IRS. They can include things like street or sidewalk construction, or water and sewer systems. They're not deductible as property taxes because these expenses can increase the value of your property.

Recordkeeping for the Deduction

Retain copies of your property tax statements and your canceled checks or bank statements to show proof of payment. You should also keep any escrow documents from the time when the property was purchased or sold because these may show additional payments of property tax that you can likewise deduct.

Impact on the Alternative Minimum Tax

The property tax deduction is an adjustment item when you're calculating the alternative minimum tax if you're liable for it, sometimes referred to as the AMT. Property taxes aren't deductible when calculating the AMT—you must add this deduction back in.

Taxpayers who are subject to the AMT will typically find that their property tax deduction results in little or no reduction in their overall federal tax liability.

Year-End Tax Planning Has Changed, Too

Taxpayers used to be able to pre-pay the next installment of their property tax before the end of the year to help boost their itemized deductions in the immediate tax year, but not anymore. For example, you might have paid your spring property tax installment in December to increase the amount of property tax you paid in the year ending in December and increase the amount of your deduction for that tax year.

Unfortunately, this tactic changed with the TCJA. Hordes of taxpayers attempted to do this in late 2017 when the tax law change was looming in January 2018. They wanted to claim their property tax deduction without limit for the 2017 tax year. This prompted the IRS to issue a ruling that these taxes would only be deductible going forward if they had already been assessed by the taxing authority at the time of payment.

You can no longer take an educated guess as to what your property taxes will be and pay them in advance. You must have received a statement from your tax authority stating the exact amount you owe. This is expected to continue to be the case in future years.