Are Property Taxes Fully Deductible?
Governmental bodies, agencies and organizations at the federal, state and local levels require funds in order to operate and provide services for their constituencies. The operation of the federal government is funded primarily through the collection of federal income taxes. State governments fund their operations primarily by a combination of state income taxes and sales taxes. Most local governments operate through a combination of sales taxes and property taxes. Taxpayers may be able to deduct amounts paid for local property taxes on their federal income tax returns.
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Real Property Taxes
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Taxpayers may claim a deduction for certain real property taxes, also referred to as real estate taxes, that are accessed by state, local or foreign taxing organizations. The taxpayer may only deduct real estate taxes that were based on the assessed value of the real estate. Real estate taxes are only deductible if all real estate in the taxing jurisdiction is charged a uniform rate. Taxpayers may only deduct amounts actually paid to the taxing authority during the tax year. Taxpayers may not deduct amounts paid into a mortgage escrow account if those funds were not paid out to the taxing authority during the tax year.
Personal Property Taxes
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Taxpayers can claim a deduction on their federal income tax returns for personal property taxes paid during the tax year. Qualifying personal property taxes include amounts assessed on personal property, provided the tax is charged annually and is only based on the property's value. Personal property taxes may go by different names in different states and municipalities, depending on the purpose of the tax. Fees, such as motor vehicle registration fees, that meet the criteria of a personal property tax are considered to be a deductible personal property tax for federal income tax purposes. Personal property taxes that are based on multiple criteria, such as value and weight, are partially deductible according to the amount of the tax that was ascribed to the value of the property.
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Reporting
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Taxpayers must typically itemize their deductions in order to deduct property taxes. The taxpayer will include deductible real estate taxes on Line 6 of IRS Form 1040, Schedule A. Taxpayers who paid qualifying personal property taxes would include them on Line 8 of IRS Form 1040, Schedule A. Taxpayers who paid real estate taxes but do not have enough deductions to itemize may qualify for an increased standard deduction for the 2010 tax year by completing IRS Form 1040, Schedule L.
Nondeductible Property Taxes
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Not all charges assessed by state or local real property taxing authorities are considered by the IRS to be property taxes and may not be deducted on the taxpayer's federal income tax return. Flat fees charged by local governmental agencies for services rendered to individual properties are not considered to be property taxes. Periodic fees and per-unit fees are not deductible as property taxes. Transfer fees on the sale of a property are not deductible as property taxes. Local assessment taxes charged for improvements to the local area that benefit the local property owner, such as street lights or sewer lines, are not deductible as property taxes.
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