Are Property Taxes Deductible on Federal Income Tax?

The joys of home ownership include a friendly property tax deduction from the IRS.
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If you're an owner of property, either residential or commercial, you're paying property taxes levied by the city, county or state where your property is located. The IRS allows the deduction of property taxes on your individual or business return. This can reduce your tax burden, but if you're filing an individual tax return, you must itemize to take advantage of this benefit.

Some Guidelines on Deductible Property Taxes

To be deductible, property taxes must be assessed on you and you must have paid them during the tax year for which you're deducting them. The IRS does not allow the deduction of special assessments for repairs and upgrades -- such as municipal curb and gutter work -- but does allow you to add these to the cost basis of your property. The IRS allows the property tax deduction on a second home. If you have property in a foreign country subject to taxes, these can also be taken as a deduction or as a more valuable foreign tax credit, which reduces your tax liability dollar for dollar.

Restrictions on Deductible Taxes

The IRS does not allow the deduction of any fees charged for municipal services (sewer, water, trash collection) that might appear on your tax bill. In addition, if you pay property tax on behalf of someone else, you can't take the deduction; the tax must be levied on you to be deductible. If an escrow account is paying out property taxes on your behalf, you can deduct only those payments made by escrow -- not your payments into the account.

Itemizing the Property Tax Deduction

For individual returns, you must itemize deductions on Schedule A to claim the property tax deduction. If you take the standard deduction, the IRS won't allow you to deduct property taxes, as well as state income or sales taxes. A business paying taxes on its commercial or investment property would include taxes paid as an expense, for example on Part II, Line 23 of Schedule C.

Pro-Rating Property Taxes Paid

If you buy a home during the year, the IRS considers you to be the legal owner on the date of sale, not on the date you moved into the house. You'll have to pro-rate the annual property taxes on the home according to how many days you owned it, and take that percentage as your deduction. You can claim the partial deduction even if the seller agreed to cover the property taxes for the entire year. You can't deduct back taxes that you pay on behalf of the seller.