Owning a home is expensive—so when the federal government offers you a tax break related to homeownership, you take it, right?
Certainly, the idea of deducting a local tax (property tax) from your federal income tax is appealing. This is referred to as a property tax deduction, and it is, in fact, an option for homeowners come tax time.
But while the answer to the question “are property taxes deductible” is yes, there are some rules you need to know before exercising this option. In this article, we’ll explain:
- Exactly what you can deduct
- How you can claim it
- Common mistakes to avoid
What Are Property Taxes and Why Do They Matter?
Every year, your local government levies a tax on your home. Two things determine the tax amount:
- The value of your property fluctuates based on various factors (the condition of the home, the real estate market, etc.)
- The municipality’s tax rate
Local governments use property tax revenue to support community services, including everything from schools and libraries to police departments, fire stations, and more. Learn more about property taxes here!
While property taxes serve a worthy purpose, they can burden homeowners. Anything that offsets this expense is worth looking into, which is where property tax deductions come in.
Deductions of any kind, including property tax deductions, reduce your taxable income. However, there are limitations on the property tax deduction—and taking it isn’t necessarily the best course of action in all cases.
Which Properties Are Eligible for Tax Deductions?
The state and local tax (SALT) deduction allows taxpayers to reduce their federally taxable income by deducting property, sales, or income taxes they have already paid to state and local governments. With regard to property tax specifically, the following types of properties are eligible for tax deductions:
Primary Residence
You can deduct property taxes paid on your primary residence. A primary, sometimes called main or principal residence, is the place you live for the majority of the year. If you bought recently, you must have occupied the residence within 60 days of closing.
Vacation Homes and Second Properties
Second homes are eligible for the same deduction rules as primary residences, as long as you personally live there part of the time.
Rental and Investment Properties
You can deduct property taxes on rental properties, but you report these differently using an IRS tax form Schedule E. In this case, property tax is listed as an expense that effectively lowers your rental income.
Business Properties
Businesses can also deduct property taxes paid on commercial properties as a business expense.
How to Deduct Property Taxes
To deduct property taxes, you must use a Schedule A of Form 1040 to itemize deductions.
Many property owners take the standard deduction on their federal income taxes, which theoretically covers a range of expenses allowed by the IRS that could legitimately be subtracted from your income. But if you plan to deduct your property taxes, you’ll itemize your expenses instead, or list them individually. (See more on taking the standard deduction vs. itemizing below.)
You’ll need to fill out the IRS form Schedule A to itemize your deductions. Add the appropriate amounts to each line on the form, which covers medical and dental expenses, taxes (including property tax), home mortgage interest, charitable gifts, and more.
A few important notes to keep in mind…
Taxes within the tax year:
Make sure to include only property taxes paid within the tax year. Depending on the property tax schedule in your area, this may mean including portions of property tax from different years.
For instance, if you plan to pay your 2024 property taxes in two installments, June 2024 and January 2025, you can include only the June 2024 payment—plus the January 2023 payment if you paid in January 2024.
Deductions with escrow accounts:
If your mortgage lender pays your taxes through an escrow account, you can deduct only the portion paid by the lender to the tax authority. You may have contributed more to the escrow account in anticipation of a higher property tax bill, but anything above and beyond the bill amount is not eligible.
Documentation:
Be sure you have supporting documentation for each of the expenses listed. You’ll need documentation that supports your property tax reduction, specifically your property tax bill, escrow statement (if applicable), and proof of payment. Make copies of these documents and hold onto them for at least three years after the date you file the return. For more information, see the IRS’s instructions for Schedule A here.
Understanding Property Tax Deduction Limits
Before you get too excited about attacking Schedule A, keep in mind this strategy may not necessarily be as beneficial as you think due to a few limitations.
For one thing, the SALT deduction is currently limited to $10,000 per year or $5,000 for married individuals filing separately. Note that this law expires in 2025, and the federal government may not renew it, so watch for changes!
Also, consider whether your itemized deduction total exceeds the standard deduction. The amount of standard deduction for tax returns filed in 2025 is $14,600 for a single person, and $29,200 for married people filing jointly.
Which deduction is it more advantageous for you to take—the standard amount or the itemized amount?
Even with property taxes as a line item, your itemized amount might not exceed the standard deduction. In that case, it simply makes better financial sense to take the standard deduction.
Itemizing deductions might be advantageous if you live in a high-tax state. For example, the average 2023 property tax bill for homeowners in Tenafly, New Jersey, was $18,167. Even if the deduction remains capped at $10,000, you can see how, combined with other allowable itemized expenses, a homeowner could conceivably exceed the standard deduction by itemizing.
In contrast, the average property tax bill in Alabama is $717. Unless you have many other legitimate expenses, exceeding the standard deduction amount in this case would be difficult.
Special Considerations for Investment and Rental Properties
You can also deduct property tax paid on rental and investment properties. Landlords or investors should report these expenses on IRS form Schedule E to reduce taxable rental income.
One important difference for rental properties: The SALT cap of $10,000 does not apply. As a result, itemizing your expenses as related to rental or investment properties could make property tax deduction a more advantageous strategy.
As with anything tax-related, keep detailed records of all your property tax payments to ensure accurate reporting.
Common Mistakes to Avoid When Claiming Property Tax Deductions
If you decide to pursue a real estate tax deduction, watch out for these common pitfalls:
Mistake #1: Attempting to deduct escrow payments instead of actual tax payments. You can still deduct property taxes when you pay by escrow (usually the case if you have a mortgage). However, some people make the mistake of listing the total amount of their escrow payments on their tax return rather than the amount the bank or lender paid to the local tax authority. These amounts are often different.
Mistake #2: Failing to keep accurate records of payments. Keeping records of your payments ensures you submit the correct deduction amount. Plus, those receipts serve as proof of your expense claims.
Mistake #3: Trying to deduct special assessment payments. According to the IRS, local taxes are deductible only if they are applied uniformly across the entire tax base. Special assessments don’t fit into this category because they apply to a limited number of property owners (only those who benefit from a specific project or repair). As a result, you cannot deduct your special assessment payment.
Are You Paying Too Much in Property Taxes?
Now that you’re aware property taxes are deductible, it’s a good strategy to have in your back pocket. But if you’re looking for ways to reduce your tax liability, you have options! One of them is to find out if you are overpaying in the first place—and reduce the amount of your tax bill.
At Ownwell, we specialize in property tax saving. We ensure homeowners, investors, and commercial real estate owners pay only their fair share of property taxes. Very often, people don’t realize that they’re overpaying or can protest the tax amount.
We get reductions in 86% of our cases, saving homeowners an average of $1,148 on their bills.
If you’d like to see how much you could save on your property taxes—and how easy it is to do it with Ownwell—sign up now!
