Real Estate Tax Deduction Tips

In addition to mortgage interest deductions, the real estate tax deduction can significantly reduce homeowners overall tax bill. Here are some tips that homeowners should consider when determining the federal real estate tax deduction that they can take.

Homeowners who pay their real estate taxes directly should keep track of their city, county, and/or municipality tax payments to determine how much of a real estate tax deduction they can take. For mortgage holders, the mortgage company typically pays the real estate tax bills directly out of the homeowner's escrow account and will notify the homeowner of the amount of real estate taxes paid.

Homebuyers should also note that any real estate taxes paid on settlement can also be taken as a real estate tax deduction in the year that they are paid.

The usage of the real estate tax deduction on one's tax form is usually fairly straightforward. The amount of real estate taxes paid can be placed in 1040 Schedule A (Itemized Deductions), the same form where mortgage interest and state taxes deductions are stated.

One potentially complicating factor regarding real estate tax deductions is the home's assessed value, which in turn may change what value a home is assessed at and what real estate taxes are levied. Any change to the home's assessed value will change the real estate taxes and, in turn, the real estate tax deduction.

For example, a homeowner may purchase their home for $200,000. Before the home sale, the taxing entity has set the home's assessed value to be $150,000. Since the home has now sold for $200,000, the taxing entity will most likely reassess the home's value to the sale price of $200,000 and will raise the homeowner's taxes to reflect this change.

Since the homeowner's real estate taxes have increased, the homeowner may increase the real estate tax deduction taken up to the amount that the taxes increase. In many cases, the homeowner will appeal the increase in real estate taxes. The real estate deduction tax situation can become somewhat tricky if the homeowner wins the appeal.

As with income taxes, real estate taxes are deducted in the year that they are paid. So, in our example, if the homeowner paid $5,000 in real estate taxes on the newly assessed value of $200,000 in 2006, the homeowner can write-off $5,000 in the 2006 tax year. Let's say that our homeowner wins his appeal and the home is now assessed at the previous value of $150,000, with the real estate property taxes becoming $4,000.

In the case where the refund is made in the tax year of 2006, then the homeowner can simply deduct this from the real estate taxes paid and enter $4,000 for the real estate tax deduction. If the appeals process is long (which they often are) and the homeowner does not receive his $1,000 refund until 2007, then the refund must be reported on the 1040 tax form in 2007 as "other income."