One of the financial benefits of home ownership is the tax deductibility of some of the costs of ownership. Mortgage interest may be deducted, a tax credit is available for certain energy saving improvements and large improvements to the home may be used to increase the basis of the property for capital gains purposes.
Deduction for Real Estate Taxes Paid
Homeowners are permitted to deduct for real estate taxes paid in that tax year. The deduction for real estate taxes is again limited only to those taxpayers who file a Schedule A, Itemized Deductions. In prior years, there was a standard deduction that permitted a flat deduction for those who did not itemize, but this is no longer permitted.
To claim the deduction, the following must be true:
- The taxes are deducted in the year they are actually paid, not when they became due. For example, if the taxpayer’s real estate taxes were due on December 15, 2012 but not paid until January 10, 2013 the taxpayer cannot claim the deduction until 2013;
- The taxes paid must be based on those uniformed charged by the taxing jurisdiction. General real estate taxes are almost always uniformly applied. Special assessments for things such as sewer, sidewalks or curbs are usually only charged to the properties receiving the improvements. Thus, special assessments are not deductible;
- If the homeowner pays into a tax and insurance escrow, the homeowner can only deduct the portion paid for taxes. (For rental property, insurance can be deducted).
Claiming the Deduction
In January, the homeowner should receive a 1098 Statement of Mortgage Interest Paid from their lender or third party escrow agent. The envelope from the lender will normally state “Important Tax Information Enclosed” on the face of the envelope. There will be a section indicating the amounts received on the escrow account and the amounts paid on the account. The taxes paid will show the amount of the taxes paid.
If the taxpayer cannot locate their 1098, they can contact the lender or third party escrow agent directly. Or, a call to the County Treasurer’s office in the county in which the real estate is located will provide the information.
For deducting taxes paid on their own home, the taxpayer will report the amount of taxes paid on Line 6 of Schedule A, Itemized Deductions. For rental real estate, the deduction should be reported on line 16, Schedule E, Supplemental Income and Loss. For agricultural property, taxes are reported on line 29, Schedule F, Profit or Loss from Farming. Those unsure about whether taxes paid are deductible in their situation may consider retaining a paid tax preparer.