One of the major benefits of home ownership is the ability to take significant tax deductions from housing expenses. In most cases, you can deduct the amount you pay for real estate or property taxes, assuming you don't get any personal benefits in return. A few exceptions and special circumstances apply.
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Choose Between Standardized and Itemized Deductions
Tax filers can either use a standard deduction amount allowed by the Internal Revenue Service or itemize deductions individually. To take advantage of specific tax breaks, such as real estate taxes, you have to itemize your deductions on your federal returns. To itemize your deductions, including property taxes, you must complete IRS Form 1040 and Schedule A, where you list individual deductions. Form 1040-EZ isn't an option when you itemize.
Understand Real Estate Deduction Basics
The basic rule is that you can deduct real estate taxes if they are charged uniformly throughout your municipality, according to IRS Publication 530. Taxes are assessed based on rates established by local and state authorities. The taxes you pay must also go toward basic infrastructure development or community upkeep. Taxes paid to a special government entity that provides water, sewage and other civil infrastructure services are also deductible. These entities are commonly called municipal utility
districts, or MUDs. If you personally benefit from the payments or receive individual services tied to the payment, you can't take a deduction. Water delivery fees and trash service fees are examples of payments you can't deduct.
Consider Additional Deduction Rules
When you sell a home during the year, you can deduct property taxes paid to the state or local government up to the date of sale. The buyer gets credit for taxes paid after the date of sale. You can typically find your payment amount in the property settlement statement. When you pay property taxes through escrow, your lender normally sends you a statement reporting how much you paid in taxes during the year. When you pay the taxing authority directly, you should receive a receipt for the payment amounts.
Recognize Special Tax Situations
Payments of delinquent taxes typically aren't deductible as of tax year 2014, reports the IRS. A buyer can't deduct the taxes paid if it is part of the purchase agreement. Any refunds or tax rebates that counter payments you made in real estate taxes during the year reduce your deductible amount. If you pay $5,800 in property taxes and receive a property tax rebate of $200, for instance, you can only take $5,600 as a property tax deduction.