The year after buying your first house is full of surprises. That’s something I’ve learned for myself this past year. There was a ton physical work that I had to do - from moving all my furniture to getting it all set up perfectly in the house.
But none of that physical labor brought anywhere near the level of stress that the “paperwork” that comes with buying a house did. So you can understand why my ears perked up when I heard a friend talking about their deduction. “You mean, I might actually benefit from this sea of papers I’ve been swimming in?
“Tell me more. What is Real Estate Tax Deduction?” I asked.
Put simply, here’s what my friend told me:
- If you pay taxes on property, you can claim specific deductions on them for things like repairs and homeowners association fees.
- As of 2018, there’s a $10,000 limit on the amount you can claim.
- Landlords get the most benefit from these deductions since they’re eligible for more items.
- Renters cannot claim property tax deductions.
- “Property” can also include land, vehicles, boats, and vacation homes.
But as you may have expected, there’s a lot more nuance to Real Estate Tax Deduction than that, so let's explore it in greater detail below:
What is Property Tax Deduction?
To get started, let's get clear on just what exactly Property Tax Deduction actually is. Other than the awesome feeling of having something that's truly yours, it's one of the main benefits of owning a home instead of renting.
Basically, when you own a home, you pay taxes for it every year. These taxes are based on the value of your property, including the land and all the buildings on it. A tax assessor will visit you every 5 years to reevaluate the value of your property.
After you've paid these yearly taxes, you'll actually be able to get some of your money back by "deducting" the cost of eligible items you paid for during that year. I'll go into more detail below about what these deductible items actually are.
What is the current Property Tax Deduction limit?
If you're like me, at this point you're probably thinking, "Oh yeah! Property Tax Deductions are awesome - bring on the savings baby!" But let's not get ahead of ourselves.
While we're lucky the ability to deduct taxes even exists in the first place (more on this shortly), like all good things they come with a limit. As of 2018, you can only deduct up to $10k from the combined property, state/local, and sales taxes that you paid during that year.
I say that we should feel lucky for this because there's an ever-growing discussion going on currently about getting rid of Property Tax Deduction. The main reasons people in favor of eliminating it give is that the deductions discriminate against renters, and also encourage people to take on more debt. To be honest, I'm not versed enough in this area to judge those arguments fairly.
How do you calculate for your Property Tax Deduction?
As mentioned above, the Property Tax is calculated by using the value of your property. Under the umbrella of "property", they'll include the value of your land and all the buildings you own on it.
Then every 5 years a tax assessor will come to your home and reevaluate your property. I'll go into further detail on this below, but personal property is not just limited to land and your main home.
It can also include things such as your vacation home, vehicles, and boats. The value of all these items will be added up to come up with your final property tax calculation.
How does Property Tax Deduction work for a Rental property?
Unfortunately, as the actual person renting a property, you won't be eligible for Property Tax Deductions. If you're a landlord though, it's a whole different story.
You'll be able to get deductions every year you pay for expenses including advertising, cleaning & maintenance, commissions to rental agents, homeowner association fees, utilities, travel expenses, and repairs.
So, you can see that landlords actually receive the biggest benefits from Property Tax Deductions of anyone. Having said that, they also have to deal with depreciation.
That's' the decrease in value that happens to your property over time because of the wear and tear that comes from tenants. But what if you only rent the property out some of the time & the rest of the time is for your personal use?
Well, if you only rent it out for 14 days or less, you won't have to pay any taxes on the rental income. This doesn't necessarily mean that you don't get any tax exemptions overall, just that you won't have the plethora of deductible items available to true landlords.
Can you pay Property Taxes for multiple years at once?
We've already talked about how you can only claim deductions on taxes you've already paid. But, what if you could pay more taxes in advance in order to claim more deductions this year?
Well, put simply - you can! As long as you have already received your official bill for next year, you can go ahead and pay it. A common reason people do this is that they're preparing for their income going down the next year, often due to retirement.
People also do it if it looks like tax laws are going to change for the worst in the following year. Just keep in mind that you'll want to make sure you're actually eligible for the deduction before you pay in advance.
Another way to get bigger deductions is by checking all your yearly registration paperwork for your vehicles for the term "property tax". If you see it, the registration fee is likely deductible.
Also, if you bought a house during that year, check your closing paperwork to see how much you paid for property taxes. This adds to your deductible amount.
What are some tax deductible items that people might not know about?
We've touched on many of these things already, but I was surprised to find how many things you can actually deduct from your property taxes. Landlords have the real advantage here since they can claim deductions for advertising, cleaning & maintenance, commissions to rental agents, homeowner association fees, utilities, travel expenses, and repairs.
But even standard property owners can claim things like land, vehicles, boats, and vacation homes. Some items that aren't deductible include assessments for the building of new streets, sidewalks, and rain gutters around your home; services like water and trash; homeowners association assessments; and taxes paid on rented or commercial property.
If you happened to buy or sell a house this year, you'll only pay taxes (and therefore be able to claim deductions) for the amount of time you owned the home. So, if you sold your house in July, you'd only pay taxes on the house up until that month.
I’ve tried my best to explain everything I know about Real Estate Tax Deduction here for you, but I’m still learning. Fortunately, I know some really great realtors who are experts in this kind of thing.
They’re always happy to answer my questions about real estate in great detail, and I know they’d be thrilled to answer any lingering questions you may have as well, so don’t hesitate to reach out to them here!