Understanding Real Estate Tax Deductions: A Comprehensive Guide

Owning a property has a number of pros, but it also comes with significant costs. One of the biggest expenses is real estate tax, also called property tax. But did you know that you could be paying less overall tax just for owning your own property? Read on to learn more about real estate/property tax deductions and how to save on your overall tax on your next filing.

Back to Basics: What is Real Estate/Property Tax?

Real estate tax is a form of tax that every property owner is liable for. This tax is payable to the state and is used to fund public services such as the police, emergency services, schools, and more. The good news is that there are ways to decrease the amount of tax you pay each year. If you aren’t super tax savvy, or you don’t have the time to do the research yourself, consider contacting cost segregation specialists who can help you determine where you can save on your annual tax payments.

How Is Real Estate Tax Calculated?

In simple terms, your real estate tax is calculated by looking at the value of the land and the property built on it as well as what state it is in. When calculating your real estate tax, you will need to multiply your estimated property value (which you can get from a tax assessor) by the tax rate for your state. For example, if you owned a $300,000 property in New Jersey, which has the highest tax rate at around 2.49%, you would be required to pay around $7,200 in tax. However, if your property was located in Hawaii, which has the lowest tax rate at 0.28%, you would only be paying $840 annually.

What Is a Real Estate Tax Deduction?

While real estate taxes are paid to the state where the property is located, these taxes can be deducted from a property owner’s federal income tax. There is a limit, however. Thanks to the passing of the 2017 Tax Cuts and Jobs Act, the real estate tax deduction is capped at $10,000. To get around this, taxpayers can instead apply for a tax credit. A tax expert can help you determine which one would be more valuable to your specific case. In addition to real estate tax deductions, property owners can also claim deductions on taxes paid during the closing sale or purchase of property during that tax year.

Do All Properties Qualify for Tax Deductions?

In order to qualify for a real estate deduction, a property must either be the primary residence of the taxpayer, a vacation home, or an investment property. However, because real estate tax and property tax are the same thing according to the IRS, deductions may also apply to land, boats, recreational vehicles, and even cars. You cannot claim a deduction on taxes for a property you do not own, or on any transfer taxes associated with buying a home. You also cannot claim deductions on any services fees for sewage, waste collection, and water and homeowners’ association fees.

How Can I Claim My Property Tax Deduction?

Any property owner can claim their deduction by completing a Schedule A form that is then submitted with their 1040 income tax form. While this requires a little more time spent on your taxes, it is generally worth the time it takes to complete.

Real estate tax deductions are just one of the tools taxpayers can use to reduce their overall annual tax figure. With a bit of research and knowledge, you too can reduce your overall tax spend and make the most of your investment.

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