How to Deduct Real Estate Taxes for Business

If you are self-employed and use part of your home for business, you may be able to deduct part of your real-estate taxes from your income. The IRS has strict rules about deducting business use of your home expenses, however. It's important to follow the rules or you could trigger an audit.

Difficulty: Moderate

Instructions

Things You'll Need:

• Form 8829
• Form 1040
• Schedule C tax form

1. Get an accounting of your state and local real-estate taxes and hold onto these documents. If you paid escrow funds to cover your property taxes, your mortgage statement should list how much you paid.

2. Determine how much square footage of your home is used for business purposes including a home office space and/or storage of inventory.

3. Derive a percentage of business use of your home by dividing the business use square footage by the total square footage of your home.

4. Enter real-estate taxes on Line 11 of Form 8829 from the IRS (see Resources below). You use form 8829 to deduct expenses for the business use of your home.

5. Follow the instructions on Form 8829 for calculating the business percentage of real estate taxes and other related expenses. In general, you will multiply your real-estate taxes by the business-use percentage.

6. Attach Form 8829 to Schedule C and Form 1040 from the IRS and file your tax returns.

7. Deduct the remaining real-estate tax expense after subtracting the business-use portion on your personal itemized tax returns.

Tips & Warnings

• If you bought your home in the last year, taxes paid in advance by the seller that went towards your property tax debt are also deductible whether or not you paid the seller back for these taxes.
• Keep all tax returns and supporting documents, such as canceled checks, in your files for a least thre years. If you are audited and do not have the documents necessary to prove your claim, you may have to pay back taxes.
• When looking for your property tax amount on your mortgage documents, be careful not to confuse the actual property taxes with the amount paid to the escrow account. Payments to the escrow account are often slightly off from what you actually owe in property taxes.

Resources

• Form 8829 from the IRS
• Form 1040 from the IRS
• Schedule C tax form from the IRS