Instead of being based on the market value of your property, tax assessments are calculated on the benefit your property receives from a community improvement. For instance, if you own a plot of land worth $30,000 and a house worth $150,000, your property taxes will be different on both. However, if both properties have the same amount of frontage and the city installs new sidewalks, your tax assessment on the two properties will be the same.
Filing Income Taxes
Tax assessments stemming from general improvements to the street on which you live or your general neighborhood are generally not tax deductible. You cannot add the additional cost of a tax assessment to your property tax deduction on an itemized tax return. Under federal income tax guidelines, you cannot deduct assessments that are for local benefits.
While you cannot deduct tax assessments for local benefits, you are able to claim depreciation if the tax assessment increases the value of buildings or other improvements to your property, but not your land. For instance, if your city adds local water service, as opposed to well service, this may increase the value of your home but not of the land itself and, as such, any tax assessment you pay for that improvement is tax deductible.
Selling a Home
When selling your home, you may deduct tax assessments from the profit you receive from the sale of your home. The reasoning here is that the tax assessment increased your costs (called your “basis”) and, in so doing, ate into your profits. As such, the IRS allows that tax assessments are deductible when selling your home. When you sell a property, you are required to file 1099-S with your yearly income taxes to report the proceeds you received from the sale of your home, which is the purchase price minus the "basis." The 1099-S form includes a worksheet that helps you calculate what your proceeds are; this is where you would enter the tax assessment amount. Find a copy of the worksheet at IRS.gov (see Resources).
According to the IRS, you can deduct tax assessments when they are for maintenance or repair to a local benefit, like sewer lines. As listed on their website: “Many states and counties also impose local benefit taxes for improvements to property, such as assessments for streets, sidewalks, and sewer lines. These taxes cannot be deducted. However, you can increase the cost basis of your property by the amount of the assessment. . . Local benefits taxes are deductible if they are for maintenance or repair, or interest charges related to those benefits.”
Renee O'Farrell is a freelance writer providing valuable tips and advice for people looking for ways to save money, as well as information on how to create, re-purpose and reinvent everyday items. Her articles offer money-saving tips and valuable insight on typically confusing topics. O'Farrell is a member of the National Press Club and holds advanced degrees in business, financial management, psychology and sociology.