How to Define Real Estate Tax

Deduct real estate taxes and reduce your tax liability.

Real estate taxes are an itemized tax deduction that home owners use to lower their taxable income. Lower taxable income means lower federal tax due, or a greater refund, when filing a personal income tax return. Individuals use a Schedule A to report real estate taxes paid for which they are taking a tax deduction. Real estate taxes may be paid directly to the taxing authority or included as part of the taxpayer's monthly mortgage payment. Real estate taxes are also referred to as property taxes.

Things You'll Need

• Real estate tax bills paid during the year

Instructions

1. Review the real estate tax payment voucher received from the local, town, county or state government. The real estate tax must be based on the assessed value of the property it relates to. In the case of condominiums and homeowner's associations, the monthly dues must not be included in the real estate tax deduction on the taxpayer's personal income tax return.

2. Account for refunds of real estate tax payments. Taxing authorities will, from time to time, reassess property values in a given area. This reassessment may result in lower real estate taxes. When determining the amount of real estate taxes to deduct on a taxpayer's federal income tax return, the amounts paid during the year must be reduced for any refunds received. However, if a refund pertains to a prior tax year and the taxpayer did not itemize deductions in that year, a portion of the refund may need to be reflected in the taxpayer's income.

3. Determine the timing of real estate tax payments. Real estate taxes paid during the calendar year are deductible on that year's tax return. However, the timing of real estate tax payments can be changed to the benefit of the taxpayer. For example, if a taxpayer normally pays real estate taxes in January and June every year but decides to pre-pay the following year's January installment in December, the taxpayer will have three itemized deductions for real estate tax. The regular January and June payments will be deducted and the extra payment made in December will also be deducted. The downside to this strategy is that the following year will only have one real estate tax payment to deduct unless the following January payment is consistently prepaid in December.

References

• Real Estate Owner: Real Estate Taxes, Also Known as "Property Taxes" are Deductible Tax Breaks for the Homeowner
• Internal Revenue Service: Publication 530 -- Tax Information for Homeowners