How to Deduct Property Taxes from Your Income Taxes

At any point in time, your home is likely to represent your largest investment. Property taxes on your investment, however, can subtract thousands of dollars away from your bottom line each year. For relief, you can deduct property tax expenses from your personal income taxes. To do so, you must identify the proper paperwork. The correct paperwork for taking the property tax deduction varies between a personal residence and investment property.

Identification

As a homeowner, you can deduct property tax expenses that are applicable to your primary residence alongside any vacation homes and investment property. At tax season, your lender will distribute Form 1098 to both the IRS and your address on record. In addition to mortgage interest, Form 1098 summarizes your total property tax payments made during the tax year through your escrow account. If you write checks directly to the local treasury, you will review recent banking records to calculate the amount of money you paid in property taxes for the year.

Itemized Deductions

For residential property, you will include property tax expenses within your itemized deductions on Schedule A. Other itemized deductions include mortgage interest expenses, state tax expenses, tax preparation fees, gifts to charity, and unreimbursed employee expenses. After completing Schedule A, you will subtract itemized deductions away from your adjustable gross income on the Form 1040 to arrive at taxable income.

Be advised that a tax deduction differs from a tax credit. A tax deduction simply lowers your taxable income, from which your tax bill is ultimately calculated. A tax credit, however, reduces your final tax bill on a dollar-for-dollar basis.

Warning

On your taxes, you may opt to either itemize deductions or take a standard deduction. You should therefore verify that your itemized deductions actually exceed your applicable standard deduction, before you decide to write off property taxes. For the 2010 tax year, you can take standard deductions of $5,700 and $11,400 as a single and married filing jointly taxpayer, respectively.

Investment Property

For investment property, you will complete tax paperwork according to business structure. As a sole proprietor, you will file Schedule C. As a partner or S Corporation, you will complete Schedule E to report investment property income. With both schedules, you will subtract property tax expenses from rents received to arrive at investment property income. You will then add this net rental income to your taxable income, before calculating personal income taxes. If the real estate is owned as part of a corporation, you will file Form 1120 to subtract property taxes away from revenue and arrive at corporate profits.

How to Deduct Property Taxes from Your Income Taxes, Sources:

IRS: Deductible Taxes

IRS: Itemized Deductions / Standard Deductions

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