Your decision to file real estate taxes on your tax return will depend on a number of factors, such as timing of payments of your property taxes, filing status and the number of itemized deductions that you claim. It makes sense for you to file property taxes on your tax return if doing so will help reduce your taxable income compared to taking a standard deduction.
Real Estate Taxes
The IRS allows you to deduct real estate taxes paid to the local or state government on your primary home and any other real estate property that you may own. There is no limit on the dollar value of the real estate tax to claim the deduction. You must have paid the real estate taxes in the year for which you are filing a return. It's not uncommon for your real estate taxes to be included in your mortgage payment and paid for you by the lender. You should receive a statement from your lender showing how much and when property taxes were paid for tax filing purposes.
Standard Deduction Versus Itemizing
The IRS allows you to take a standard deduction to reduce your taxable income or itemize your deductions on Schedule A. The standard deduction is a flat amount that is predefined by the IRS. For example, the standard deduction for individuals is $5,700 and $11,400 for married filing jointly as of 2010. The decision to claim a standard deduction versus itemizing depends on the individual circumstance; however, the general rule of thumb is to itemize if these deductions are greater than the standard deduction. Having a higher number of itemized deductions lowers your tax liability.
There are instances where you are not allowed to deduct real estate taxes when you file your return. For instance, you are not allowed to deduct delinquent property taxes that you agree to pay on a home you purchased. You are also not allowed to deduct real estate taxes that were paid from an escrow account. If you receive a real estate tax rebate or refund, you must deduct this amount from the real estate taxes paid for the year when you file your return.
Calculating Property Tax Deduction
If you paid $4,000 in real estate taxes for the year, you can claim the entire amount if you itemize your deductions. However, if you only owned the property for part of the year, you have to figure the amount you can deduct on a pro rata basis. For example, if you only owned your home for 122 days, you can only use the property taxes paid for that time period. In this case, you would first divide 122 days by 365 and then multiply by the annual tax of $4,000. This means you can deduct $1,337 from your tax return and, when adding your itemized deductions, add $1,337 in real estate taxes to the total. If your total itemized deductions are greater than your allowed standard deduction, you should report property taxes on Schedule A.