1.27- What are Property Taxes and how is it claimed?
What You Can and Can’t Deduct
To deduct expenses of owning a home, you must file Form 1040, U.S. Individual Income Tax Return, or Form 1040-SR, U.S. Income Tax Return for Seniors, and itemize your deductions on Schedule A (Form 1040). If you itemize, you can’t take the standard deduction.
This section explains what expenses you can deduct as a homeowner. It also points out expenses that you can’t deduct. There are four primary discussions: state and local real estate taxes, sales taxes, home mortgage interest, and mortgage insurance premiums.
Generally, your real estate taxes and home mortgage interest are included in your house payment.
Your house payment.
If you took out a mortgage (loan) to finance the purchase of your home, you probably have to make monthly house payments. Your house payment may include several costs of owning a home. The only costs you can deduct are state and local real estate taxes actually paid to the taxing authority and interest that qualifies as home mortgage interest, and mortgage insurance premiums. These are discussed in more detail later.
Some nondeductible expenses that may be included in your house payment include:
Fire or homeowner's insurance premiums, and
The amount applied to reduce the principal of the mortgage.
Minister's or military housing allowance.
If you are a minister or a member of the uniformed services and receive a housing allowance that isn’t taxable, you can still deduct your real estate taxes and your home mortgage interest. You don’t have to reduce your deductions by your nontaxable allowance. For more information, see Pub. 517, Social Security and Other Information for Members of the Clergy and Religious Workers, and Pub. 3, Armed Forces' Tax Guide.
Nondeductible payments.
You can’t deduct any of the following items.
Insurance (other than mortgage insurance premiums), including fire and comprehensive coverage, and title insurance.
Wages you pay for domestic help.
Depreciation.
The cost of utilities, such as gas, electricity, or water.
Most settlement costs. See Settlement or closing costs under Cost as Basis, later, for more information.
Forfeited deposits, down payments, or earnest money.
Internet or wifi system or service.
Homeowners association fees, condominium association fees, or common charges.
Repairs to home.
Hardest Hit Fund and Emergency Homeowners' Loan Programs
You can use a special method to figure your deduction for mortgage interest and real estate taxes on your main home if you meet the following two conditions.
If you received assistance under:
A State Housing Finance Agency (State HFA) Hardest Hit Fund program in which program payments could be used to pay mortgage interest, or
An Emergency Homeowners' Loan Program (EHLP) administered by the Department of Housing and Urban Development (HUD) or a state.
You meet the rules to deduct all of the mortgage interest on your loan and all of the real estate taxes on your main home, then you can use a special method to figure your deduction for mortgage interest and real estate taxes on your main home.
If you meet these conditions, then you can deduct all of the payments you actually made during the year to your mortgage servicer, the State HFA, or HUD on the home mortgage (including the amount shown in box 3 of Form 1098-MA, Mortgage Assistance Payments), but not more than the sum of the amounts shown in box 1 (mortgage interest received), box 5 (mortgage insurance premiums), and box 10 (real property taxes) of Form 1098, Mortgage Interest Statement.
You may first allocate amounts paid to mortgage interest up to the amount shown on Form 1098. You may then use any reasonable method to allocate the remaining balance of the payments to real property taxes. Regardless of how you determine the deductible amount under this special safe harbor method, any amount allocated to state or local property taxes is subject to the limitation on the deduction for state and local taxes. However, you aren’t required to use this special method to figure your deduction for mortgage interest and real estate taxes on your main home.
.For additional guidance, see Notice 2018-63, available at IRS.gov/irb/2018-34_IRB#NOT-2018-63..
Homeowners Assistance Fund
There is an optional method for determining your mortgage interest and state and local real property tax deduction if you received assistance from a State or an entity of a State that was funded from amounts from the Homeowners Assistance Fund program in which a portion of the program payments is used to pay mortgage interest, mortgage insurance premiums or State and local real property taxes on your main home, and you meet the following two requirements:
You paid the remaining portion of the mortgage interest, mortgage insurance premiums, or State and local real property taxes from your own sources (that is out of pocket payments not subsidized by any governmental financial assistance programs), and
You meet the rules to deduct all of the mortgage interest and mortgage insurance premiums on your loan and all of the real estate taxes on your main home, then there is an optional method to figure your itemized deduction for mortgage interest, mortgage insurance premiums, and State and local real estate taxes on your main home.
The optional method allows you to deduct the mortgage interest, mortgage insurance premiums, and State and local real property taxes reported on Form 1098, but only up to the amount you paid from your own sources to the mortgage servicer during the tax year. You are not required to use this optional method to figure your deduction for mortgage interest, mortgage insurance premiums, and State and local real property taxes on your main home.
.See sections on State and Local Real Estate Taxes, Mortgage Interest, and Mortgage Insurance Premiums in this publication to determine whether you meet the rules to deduct all of the mortgage interest and mortgage insurance premiums on your loan and all of the real estate taxes on your main home..
State and Local Real Estate Taxes
Most state and local governments charge an annual tax on the value of real property. This is called a real estate tax. You can deduct the tax if it is assessed uniformly at a like rate on all real property throughout the community. The proceeds must be for general community or governmental purposes and not be a payment for a special privilege granted or special service rendered to you.
.The deduction for state and local taxes, including real estate taxes, is limited to $10,000 ($5,000 if married filing separately). See the Instructions for Schedule A (Form 1040) for more information. .
Deductible Real Estate Taxes
You can deduct real estate taxes imposed on you. You must have paid them either at settlement or closing, or to a taxing authority (either directly or through an escrow account) during the year. If you own a cooperative apartment, see Special Rules for Cooperatives, later.
Where to deduct real estate taxes.
Enter the amount of your deductible state and local real estate taxes on Schedule A (Form 1040), line 5b.
Real estate taxes paid at settlement or closing.
Real estate taxes are generally divided so that you and the seller each pay taxes for the part of the property tax year you owned the home. Your share of these taxes is fully deductible if you itemize your deductions.
Division of real estate taxes.
For federal income tax purposes, the seller is treated as paying the property taxes up to, but not including, the date of sale. You (the buyer) are treated as paying the taxes beginning with the date of sale. This applies regardless of the lien dates under local law. Generally, this information is included on the settlement statement you get at closing.
You and the seller each are considered to have paid your own share of the taxes, even if one or the other paid the entire amount. You each can deduct your own share, if you itemize deductions, for the year the property is sold.
Example.
You bought your home on September 1. The property tax year (the period to which the tax relates) in your area is the calendar year. The tax for the year was $730 and was due and paid by the seller on August 15.
You owned your new home during the property tax year for 122 days (September 1 to December 31, including your date of purchase). You figure your deduction for real estate taxes on your home as follows.
1.
Enter the total real estate taxes for the real property tax year
$730
2.
Enter the number of days in the property tax year that you owned the property
122
3.
Divide line 2 by 365
0.3342
4.
Multiply line 1 by line 3. This is your deduction. Enter it on Schedule A (Form 1040), line 5b
$244
You can deduct $244 on your return for the year if you itemize your deductions. You are considered to have paid this amount and can deduct it on your return even if, under the contract, you didn’t have to reimburse the seller.
Delinquent taxes.
Delinquent taxes are unpaid taxes that were imposed on the seller for an earlier tax year. If you agree to pay delinquent taxes when you buy your home, you can’t deduct them. You treat them as part of the cost of your home. See Real estate taxes, later, under Basis.
Escrow accounts.
Many monthly house payments include an amount placed in escrow (put in the care of a third party) for real estate taxes. You may not be able to deduct the total you pay into the escrow account. You can deduct only the real estate taxes that the lender actually paid from escrow to the taxing authority. Your real estate tax bill will show this amount.
Refund or rebate of real estate taxes.
If you receive a refund or rebate of real estate taxes this year for amounts you paid this year, you must reduce your real estate tax deduction by the amount refunded to you. If the refund or rebate was for real estate taxes paid for a prior year, you may have to include some or all of the refund in your income. For more information, see Recoveries in Pub. 525, Taxable and Nontaxable Income.
Items You Can’t Deduct as Real Estate Taxes
The following items aren’t deductible as real estate taxes.
Charges for services.
An itemized charge for services to specific property or people isn’t a tax, even if the charge is paid to the taxing authority. You can’t deduct the charge as a real estate tax if it is:
A unit fee for the delivery of a service (such as a $5 fee charged for every 1,000 gallons of water you use),
A periodic charge for a residential service (such as a $20 per month or $240 annual fee charged to each homeowner for trash collection), or
A flat fee charged for a single service provided by your local government (such as a $30 charge for mowing your lawn because it had grown higher than permitted under a local ordinance).
.You must look at your real estate tax bill to decide if any nondeductible itemized charges, such as those listed above, are included in the bill. If your taxing authority (or lender) doesn’t furnish you a copy of your real estate tax bill, ask for it. Contact the taxing authority if you need additional information about a specific charge on your real estate tax bill..
Assessments for local benefits.
You can’t deduct amounts you pay for local benefits that tend to increase the value of your property. Local benefits include the construction of streets, sidewalks, or water and sewer systems. You must add these amounts to the basis of your property.
You can, however, deduct assessments (or taxes) for local benefits if they are for maintenance, repair, or interest charges related to those benefits. An example is a charge to repair an existing sidewalk and any interest included in that charge.
If only a part of the assessment is for maintenance, repair, or interest charges, you must be able to show the amount of that part to claim the deduction. If you can’t show what part of the assessment is for maintenance, repair, or interest charges, you can’t deduct any of it.
An assessment for a local benefit may be listed as an item in your real estate tax bill. If so, use the rules in this section to find how much of it, if any, you can deduct.
Transfer taxes (or stamp taxes).
You can't deduct transfer taxes and similar taxes and charges on the sale of a personal home. If you are the buyer and you pay them, include them in the cost basis of the property. If you are the seller and you pay them, they are expenses of the sale and reduce the amount realized on the sale.
Homeowners’ association assessments.
You can't deduct these assessments because the homeowners’ association, rather than a state or local government, imposes them.
Foreign taxes you paid on real estate.
You can't deduct foreign taxes you paid on real estate.
Special Rules for Cooperatives
If you own a cooperative apartment, some special rules apply to you, though you generally receive the same tax treatment as other homeowners. As an owner of a cooperative apartment, you own shares of stock in a corporation that owns or leases housing facilities. You can deduct your share of the corporation's deductible real estate taxes if the cooperative housing corporation meets the following conditions.
The corporation has only one class of stock outstanding.
Each stockholder, solely because of ownership of the stock, can live in a house, apartment, or house trailer owned or leased by the corporation.
No stockholder can receive any distribution out of capital, except on a partial or complete liquidation of the corporation.
At least one of the following.
At least 80% of the corporation's gross income for the tax year was paid by the tenant-stockholders. For this purpose, gross income means all income received during the entire tax year, including any received before the corporation changed to cooperative ownership.
At least 80% of the total square footage of the corporation's property must be available for use by the tenant-stockholders during the entire tax year.
At least 90% or more of the expenditures paid or incurred by the corporation were used for the acquisition, construction, management, maintenance, or care of the corporation’s property for the benefit of the tenant-shareholders during the entire tax year.
Tenant-stockholders.
A tenant-stockholder can be any entity (such as a company or corporation, trust, estate, partnership, or association) as well as an individual. The tenant-stockholder doesn't have to live in any of the cooperative's dwelling units. The units that the tenant-stockholder has the right to occupy can be rented to others.
Deductible taxes.
You figure your share of real estate taxes in the following way.
Divide the number of your shares of stock by the total number of shares outstanding, including any shares held by the corporation.
Multiply the corporation's deductible real estate taxes by the number you figured in (1). This is your share of the real estate taxes.
Generally, the corporation will tell you your share of its real estate tax. This is the amount you can deduct if it reasonably reflects the cost of real estate taxes for your dwelling unit.
Refund of real estate taxes.
If the corporation receives a refund of real estate taxes it paid in an earlier year, it must reduce the amount of real estate taxes paid this year when it allocates the tax expense to you. Your deduction for real estate taxes the corporation paid this year is reduced by your share of the refund the corporation received.
Sales Taxes
Generally, you can elect to deduct state and local general sales taxes instead of state and local income taxes as an itemized deduction on Schedule A (Form 1040). You must check the box on Schedule A (Form 1040), line 5a, if you elect this option. Deductible sales taxes may include sales taxes paid on your home (including mobile and prefabricated), or home building materials if the tax rate was the same as the general sales tax rate. For information on figuring your deduction, see the Instructions for Schedule A (Form 1040).
.The deduction for state and local taxes, including general sales taxes, if elected instead of income taxes, is limited to $10,000 ($5,000 if married filing separately). See the Instructions for Schedule A (Form 1040) for more information. .
.If you elect to deduct the sales taxes paid on your home, or home building materials, you can't include them as part of your cost basis in the home..
Home Mortgage Interest
This section of the publication gives you basic information about home mortgage interest, including information on interest paid at settlement, points, and Form 1098, Mortgage Interest Statement.
Most home buyers take out a mortgage (loan) to buy their home. They then make monthly payments to either the mortgage holder or someone collecting the payments for the mortgage holder.
Usually, you can deduct the entire part of your payment that is for mortgage interest if you itemize your deductions on Schedule A (Form 1040). However, your deduction may be limited. See Limits on home mortgage interest next for more information.
Limits on home mortgage interest.
Your deduction for home mortgage interest is subject to a number of limits. If one or more of the following limits applies, see Pub. 936 to figure your deduction. Also see Pub. 936 if you later refinance your mortgage or buy a second home.
Limit for loan proceeds not used to buy, build, or substantially improve your home.
You can only deduct home mortgage interest to the extent that the loan proceeds from your home mortgage are used to buy, build, or substantially improve the home securing the loan. The only exception to this limit is for loans taken out on or before October 13, 1987; the loan proceeds for these loans are treated as having been used to buy, build, or substantially improve the home. See Pub. 936 for more information about loans taken out on or before October 13, 1987.
Limit on loans taken out on or before December 15, 2017.
For qualifying debt taken out on or before December 15, 2017, you can only deduct home mortgage interest on up to $1 million ($500,000 if you are married filing separately) of that debt. The only exception is for loans taken out on or before October 13, 1987; see Pub. 936 for more information about loans taken out on or before October 13, 1987.
See Pub. 936 to figure your deduction if you have loans taken out on or before December 15, 2017, that exceed $1 million ($500,000 if you are married filing separately).
Limit on loans taken out after December 15, 2017.
For qualifying debt taken out after December 15, 2017, you can only deduct home mortgage interest on up to $750,000 ($375,000 if you are married filing separately) of that debt. If you also have qualifying debt subject to the $1 million ($500,000 if you are married filing separately) limitation discussed under Limit on loans taken out on or before December 15, 2017, earlier, the $750,000 limit for debt taken out after December 15, 2017, is reduced by the amount of your qualifying debt subject to the $1 million limit. An exception exists for certain loans taken out after December 15, 2017, but before April 1, 2018. If the exception applies, your loan may be treated in the same manner as a loan taken out on or before December 15, 2017. See Pub. 936 for more information about this exception.
See Pub. 936 to figure your deduction if you have loans taken out after October 13, 1987 that exceed $750,000 ($375,000 or less if you are married filing separately).
Limit when loans exceed the fair market value of the home.
If the total amount of all mortgages is more than the fair market value of the home, see Pub. 936 to figure your deduction.
Refund of home mortgage interest.
If you receive a refund of home mortgage interest that you deducted in an earlier year and that reduced your tax, you must generally include the refund in income in the year you receive it. For more information, see Recoveries in Pub. 525. The amount of the refund will usually be shown on the mortgage interest statement you receive from your mortgage lender. See Mortgage Interest Statement, later.
Deductible Mortgage Interest
To be deductible, the interest you pay must be on a loan secured by your main home or a second home, regardless of how the loan is labeled. The loan can be a first or second mortgage, a home improvement loan, a home equity loan, or a refinanced mortgage.
.Interest paid on home mortgage proceeds is only deductible to the extent the loan proceeds were used to buy, build, or substantially improve your home. .
Prepaid interest.
If you pay interest in advance for a period that goes beyond the end of the tax year, you must spread this interest over the tax years to which it applies. Generally, you can deduct in each year only the interest that qualifies as home mortgage interest for that year. An exception (discussed later) applies to points.
Late payment charge on mortgage payment.
You can deduct as home mortgage interest a late payment charge if it wasn't for a specific service in connection with your mortgage loan.
Mortgage prepayment penalty.
If you pay off your home mortgage early, you may have to pay a penalty. You can deduct that penalty as home mortgage interest, provided the penalty isn't for a specific service performed or cost incurred in connection with your mortgage loan.
Ground rent.
In some states (such as Maryland), you may buy your home subject to a ground rent. A ground rent is an obligation you assume to pay a fixed amount per year on the property. Under this arrangement, you are leasing (rather than buying) the land on which your home is located.
Redeemable ground rents.
If you make annual or periodic rental payments on a redeemable ground rent, you can deduct the payments as mortgage interest. The ground rent is a redeemable ground rent only if all of the following are true.
Your lease, including renewal periods, is for more than 15 years.
You can freely assign the lease.
You have a present or future right (under state or local law) to end the lease and buy the lessor's entire interest in the land by paying a specified amount.
The lessor's interest in the land is primarily a security interest to protect the rental payments to which he or she is entitled.
Payments made to end the lease and buy the lessor's entire interest in the land aren't redeemable ground rents. You can't deduct them.
Nonredeemable ground rents.
Payments on a nonredeemable ground rent aren't mortgage interest. You can deduct them as rent only if they are a business expense or if they are for rental property.
Cooperative apartment.
You can usually treat the interest on a loan you took out to buy stock in a cooperative housing corporation as home mortgage interest if you own a cooperative apartment, and the cooperative housing corporation meets the conditions described earlier under Special Rules for Cooperatives. In addition, you can treat as home mortgage interest your share of the corporation's deductible mortgage interest. Figure your share of mortgage interest the same way that is shown for figuring your share of real estate taxes in the Example under Division of real estate taxes, earlier. For more information on cooperatives, see Special Rule for Tenant-Stockholders in Cooperative Housing Corporations in Pub. 936.
Refund of cooperative's mortgage interest.
You must reduce your mortgage interest deduction by your share of any cash portion of a patronage dividend that the cooperative receives. The patronage dividend is a partial refund to the cooperative housing corporation of mortgage interest it paid in a prior year.
If you receive a Form 1098 from the cooperative housing corporation, the form should show only the amount you can deduct.
SBA disaster home loans.
Interest paid on disaster home loans from the Small Business Administration (SBA) is deductible as mortgage interest if the requirements discussed earlier under Home Mortgage Interest are met.
Mortgage Interest Paid at Settlement
One item that normally appears on a settlement or closing statement is home mortgage interest.
You can deduct the interest that you pay at settlement if you itemize your deductions on Schedule A (Form 1040). This amount should be included in the mortgage interest statement provided by your lender. See the discussion under Mortgage Interest Statement, later. Also, if you pay interest in advance, see Prepaid interest, earlier, and Points next.
Points
The term “points” is used to describe certain charges paid, or treated as paid, by a borrower to obtain a home mortgage. Points may also be called loan origination fees, maximum loan charges, loan discount, or discount points.
A borrower is treated as paying any points that a home seller pays for the borrower's mortgage. See Points paid by the seller, later.
General rule.
You can't deduct the full amount of points in the year paid. They are prepaid interest, so you must generally deduct them over the life (term) of the mortgage.
Exception.
You can deduct the full amount of points in the year paid if you meet all the following tests.
Your loan is secured by your main home. (Generally, your main home is the one you live in most of the time.)
Paying points is an established business practice in the area where the loan was made.
The points paid weren't more than the points generally charged in that area.
You use the cash method of accounting. This means you report income in the year you receive it and deduct expenses in the year you pay them. Most individuals use this method.
The points weren't paid in place of amounts that ordinarily are stated separately on the settlement statement, such as appraisal fees, inspection fees, title fees, attorney fees, and property taxes.
The funds you provided at or before closing, plus any points the seller paid, were at least as much as the points charged. The funds you provided aren't required to have been applied to the points. They can include a down payment, an escrow deposit, earnest money, and other funds you paid at or before closing for any purpose. You can't have borrowed these funds.
You use your loan to buy or build your main home.
The points were figured as a percentage of the principal amount of the mortgage.
The amount is clearly shown on the settlement statement (such as the Uniform Settlement Statement, Form HUD-1) as points charged for the mortgage. The points may be shown as paid from either your funds or the seller's.
Note.
If you meet all of the tests listed above and you itemize your deductions in the year you get the loan, you can either deduct the full amount of points in the year paid or deduct them over the life of the loan, beginning in the year you get the loan. If you do not itemize your deductions in the year you get the loan, you can spread the points over the life of the loan and deduct the appropriate amount in each future year, if any, when you do itemize your deductions.
Home improvement loan.
You can also fully deduct in the year paid points paid on a loan to substantially improve your main home if you meet the first six tests listed earlier.
Refinanced loan.
If you use part of the refinanced mortgage proceeds to substantially improve your main home and you meet the first six tests listed earlier, you can fully deduct the part of the points related to the improvement in the year you paid them with your own funds. You can deduct the rest of the points over the life of the loan.
Points not fully deductible in year paid.
If you don’t qualify under the exception to deduct the full amount of points in the year paid (or choose not to do so), see Points in Pub. 936 for the rules on when and how much you can deduct.
Figure A.
You can use Figure A as a quick guide to see whether your points are fully deductible in the year paid.