The end of 2020 is almost upon us, so it’s time to start preparing for tax season. One of the many benefits of being a homeowner or real estate investor is the property tax deduction, but it’s not essential to own a house to receive this tax break — you may also qualify for taxes on land or vehicles.
You are able to deduct a combination of property taxes and either state and local income taxes or sales taxes.
Potential property and real estate taxes deductions include:
· Primary home
· Co-op apartment
· Vacation homes
· Property outside the U.S.
· Cars, RVs, boats and other vehicles
The IRS will not permit property tax deductions for:
· Taxes on property you do not own
· Property taxes yet to be paid
· Valuations for building streets, sidewalks, or water and sewer structures in your area. (Taxes for upkeep or repair of those items are eligible.)
· The slice of your tax bill that is for services like water or trash
· Transfer taxes on property sale
· H.O.A. appraisals
· Expenses on loans that finance energy-saving home upgrades. (Interest portion of your payment could potentially be deductible as home mortgage interest.)
· Excess of $10,000 ($5,000 if married filing independently) for a mixture of property taxes and either state and local income taxes or sales taxes.
Taking advantage of property tax deduction
· Locate your tax records. Your local tax specialist can give you a copy of the tax bill for your property. But you ought to inspect the registration paperwork on your car, RV, boat, etc., to see if you’re paying taxes on those too, and part of that based on the worth of the vehicle is probably deductible.
· Use Schedule A when you file. This is where you calculate your deduction. This means you’ll want to itemize your taxes rather than taking the standard deduction. Itemizing is likely to take longer than the standard deduction, but you might end up with a lesser tax bill.
· Deduct in the same year you pay. This isn’t always as easy as it sounds. The two ways people typically pay property taxes on a house are writing a check once or twice a year, or setting aside money each month in an escrow account when the mortgage is paid. Despite how the second looks or sounds, only deduct the taxes paid during the year. Don't make the assumption that you're paying the tax when you provide the money to your escrow company.
Did you buy or sell property this year?
· If you owned taxable property for a portion of the year prior to selling it, you can usually deduct the taxes that correlate to the time you owned the property. Assume you sold your home in July, you would deduct the first six months’ property taxes on the house, and the buyer would deduct the latter six months.
Maximize property tax deduction
1. Prepay property taxes. If you pay the bill several months in advance the year before it’s due, you can deduct it this year instead of the next.
2. Save registration statements. When your vehicle registration needs to be renewed, check if any part of the cost is property tax. There could be a hidden tax deduction in there.
3. Inspect closing paperwork. If you bought or sold a house, be sure you know what you paid at closing for property taxes. It’s an easy oversight. And once the tax assessor has a chance to revalue the property, you might get a subsequent tax bill.