If you own a home or property in the U.S., you may be wondering if you can deduct your real estate taxes from your federal income taxes. The answer is: it depends. The tax rules for real estate vary depending on how you use the property, whether it’s your primary residence, a second home, or a rental property.
The rules for deducting real estate taxes can be complex, but in general, homeowners can deduct the real estate taxes they pay on their primary residence and any other real estate that they own, such as a vacation home or investment property. Businesses can also deduct the real estate taxes they pay on the business property that they own or lease.
In this article, we will explain everything you need to know about deducting real estate taxes on your tax return
Property Taxes for Primary and Second Homes
You can deduct real estate taxes imposed on you by state and local governments for your primary and second homes. You must have paid them either at settlement or closing or to a taxing authority (either directly or through an escrow account) during the year. If you own a cooperative apartment, there are special rules for deducting your share of the real estate taxes paid by the cooperative housing corporation.
However, there is a limit on how much property taxes you can deduct. The deduction for state and local taxes (SALT), which includes property taxes, is capped at $10,000 ($5,000 if married filing separately) for tax years 2018 to 2025. This means that you can only deduct up to $10,000 of your total property taxes and either state and local income taxes or sales taxes.
Another limitation is that you must itemize your deductions on Schedule A to claim the property tax deduction. This means that you must have enough deductible expenses to exceed the standard deduction, which is $12,950 for single filers and $25,900 for married couples filing jointly in 2022. If you take the standard deduction, you cannot deduct your property taxes.
Property Taxes for Foreign Homes
If you own a home or property in a foreign country, the tax rules are similar to those for domestic homes, with one exception. You can still deduct mortgage interest, mortgage points, and private mortgage insurance (PMI) on up to $750,000 ($375,000 if married filing separately) of secured mortgage debt for your first and second homes. However, you cannot deduct foreign property taxes on your U.S. tax return. The deduction for foreign real estate taxes was eliminated by the Tax Cuts and Jobs Act of 2017 for tax years 2018 to 2025.
Property Taxes for Rental Properties
If you rent out your home or property to others, you can deduct the real estate taxes as a rental expense on Schedule E. You can deduct the full amount of the property taxes, regardless of the SALT limit or whether you itemize or not. However, you must report any rental income you receive from the property and deduct any other expenses related to renting out the property, such as mortgage interest, insurance, repairs, maintenance, and depreciation.
The tax rules for rental properties depend on how many days you use the home for personal use versus rental use. If you use the home for more than 14 days or more than 10% of the total days rented out at fair market value (whichever is greater), you must divide your expenses between personal and rental use based on the number of days used for each purpose.
You can only deduct the rental portion of your expenses on Schedule E. If you use the home for 14 days or less or 10% or less of the total days rented out at fair market value (whichever is smaller), you can deduct all of your expenses on Schedule E and do not have to report any personal use days.
Other Tax Deductions for Homeowners
Besides property taxes, homeowners may also qualify for other tax deductions related to their homes. Some of these deductions are:
- Mortgage interest deduction: You can deduct the interest paid on up to $750,000 ($375,000 if married filing separately) of mortgage debt used to buy, build, or improve your primary or second home. This limit applies to loans taken after December 15, 2017. For loans taken before that date, the limit is $1 million ($500,000 if married filing separately). You must itemize your deductions and receive Form 1098 from your lender to claim this deduction.
- Mortgage points deduction: You can deduct the points paid to obtain your home mortgage as interest if they meet certain requirements. Points are prepaid interest that reduces your loan’s interest rate. Generally, you can deduct points in full in the year they are paid if they are charged only for the use of money; they are computed as a percentage of the principal amount of the loan; they are paid by either buyer or seller; and they are the norm in your area. Otherwise, you must amortize the points over the life of the loan.
- Private mortgage insurance (PMI) deduction: You can deduct the premiums paid for private mortgage insurance (PMI) on your home loan as interest if you meet the income and loan amount criteria. PMI is a type of insurance that protects the lender if you default on your loan. You can deduct PMI premiums paid or accrued in 2022 if your adjusted gross income (AGI) is less than $109,000 ($54,500 if married filing separately) and your loan was taken out after 2006 to buy, build, or improve your home.
- Home office deduction: You can deduct expenses related to the business use of a part of your home if you meet the requirements for this deduction. You must use the part of your home exclusively and regularly for business purposes; it must be your principal place of business or a place where you meet clients or customers; and you must not rent out the part of your home to your employer and use it to perform services as an employee. You can choose between two methods to calculate this deduction: the simplified method or the regular method. The simplified method allows you to deduct $5 per square foot of your home office area, up to a maximum of 300 square feet. The regular method requires you to allocate your actual expenses (such as mortgage interest, property taxes, utilities, repairs, etc.) between personal and business use based on the percentage of your home used for business.
- Energy efficient home improvement credit: You can claim a tax credit for making certain energy efficient improvements to your home. The credit is 10% of the cost of qualified energy efficient improvements, such as insulation, windows, doors, roofs, etc., plus 100% of the cost of qualified residential energy property expenditures, such as solar panels, solar water heaters, geothermal heat pumps, etc. The credit is subject to a lifetime limit of $500 ($200 for windows) and applies only to existing homes that are your principal residence. The credit is available for property placed in service by December 31, 2022.
In summary, homeownership can provide many tax benefits for homeowners, such as deductions for property taxes, mortgage interest, mortgage points, PMI, and home office expenses. Homeowners may also claim tax credits for making energy efficient improvements to their homes. However, there are also limitations and rules that you need to follow to claim these benefits correctly. It’s important to keep track of your home-related expenses and receipts and consult a tax professional if you have any questions about your specific situation.
