One of the larger deductions taxpayers take advantage of is for the real estate taxes they pay on all properties they own. The number of properties you can claim a property tax deduction for have no limit. However, where and how you report the deduction may be different for each property, depending on whether it’s a personal residence or a rental home.
Regardless of how many personal homes you own, you can deduct all property tax payments you make on a Schedule A attachment to your tax return, provided you choose to itemize your deductions. Before claiming the deduction, you must ensure the tax qualifies as a deductible property tax. This requires your state or local government to assess the tax on the value of all homes within the community using a uniform rate. Once the government collects the tax, it must use that revenue for the general welfare of the residents within its jurisdiction and not to fund special projects that only benefit select members of the community.
Assuming Seller’s Taxes
One exception to the rule allowing you to deduct property taxes is if you assume the seller’s property tax obligations when you purchase the property. The IRS assumes that you will incorporate the property tax assumption into the price of the home and therefore requires you to treat those tax payments as if they are part of the purchase price. As with any property purchase, none of your costs, including property taxes are deductible.
If you own a rental property that generates rental income for you during the year, then you can deduct all property tax payments you make. However, you can only claim the deduction if you report all of your rental income to the IRS. Under no circumstances does the IRS allow you receive your rental income tax-free and still claim property tax deductions. Generally, the tax laws require you to prepare a Schedule E attachment to your tax return. This schedule separately states all rental income and expenses, including the property taxes, to arrive at your net rental earnings that will be subject to tax. Once you finalize Schedule E, you incorporate your net earnings into your personal tax form and pay the same tax rates on it as you do on other non-rental income.
Using Schedule C
In some cases, the IRS will treat your rental activities as a separate business rather than just an income supplement. This only occurs when you actively engage in managing the property on a regular basis; making it more like a business than a property investment. A Schedule C is necessary in place of a Schedule E when you provide substantial services to tenants. This can include providing regular linen and maid services, for example. When you fill out a Schedule C, you can fully deduct all property tax payments as an ordinary business expense.
Jeff Franco's professional writing career began in 2010. With expertise in federal taxation, law and accounting, he has published articles in various online publications. Franco holds a Master of Business Administration in accounting and a Master of Science in taxation from Fordham University. He also holds a Juris Doctor from Brooklyn Law School.