What is the property tax deduction and does it make sense for you to take it?
Property tax deduction faqs
Here are some common questions and answers about the property tax deduction.
What is the difference between a tax deduction and a tax exemption?
Some state and local governments offer Property tax exemptions to reduce or waive the amount of taxes paid by certain residents, usually on the basis of age, disability or military service. There is also a homestead exemption in many areas for your primary residence. To find out if your municipality offers an exemption and if you qualify, check your local government’s website.
What is escrow and how does it pay my property taxes?
You also might not think much about property taxes throughout the year if, like many homeowners, your taxes and home insurance are paid through escrow accounts you set up with your mortgage agent.
Under these escrow agreements, you pay extra with each mortgage payment. Your lender deposits these extra dollars in an escrow account. When your property taxes and home insurance bills are due, your lender uses the funds in this account to pay them on your behalf. That way, property taxes affect your mortgage payments, making them higher than they would be if you hadn’t blocked your taxes and insurance. Escrow arrangements, however, eliminate the risk of you missing your property tax payments, and even if you pay your property taxes through an escrow account, you can still deduct them from your income taxes.
How do I know what the property taxes will be on the properties I am considering?
While you can deduct them, it’s important to consider the impact that property taxes can have on your home purchase. The higher your property taxes, the more expensive it will be to own your home. For example, let’s say your home is subject to annual property taxes estimated at $ 8,400. If you sequester your property taxes, that will add $ 700 to your monthly mortgage payment.
You can also ask sellers what they pay, but understand that you will likely pay more if your purchase price exceeds the current owner’s estimated value. It also varies because you might qualify for different exemptions as well.
Are there any exceptions to the property tax deduction?
You cannot claim deductions for all types of taxes levied on your properties. For example, you cannot deduct the cost of assessments imposed on you for the construction of streets, water systems, sewers and sidewalks in your community. You cannot deduct the portion of your property tax bill that is allocated to services such as water or garbage collection.
If you live in a building or community that charges homeowners association fees, you cannot deduct them. And you can’t deduct payments you made on loans that fund adding energy-efficient upgrades to your home, either. Depending on your situation, other deductions and credits may be available for these energy efficient home improvements.