How much of your property taxes are deductible?

Millions of Americans file taxes annually. In 2023 alone, the Internal Revenue Service (IRS) recorded a whopping 163 million individual tax returns.

Despite its significance in the lives of millions of US citizens, a majority of Americans still find the federal tax code confounding. Without a proper understanding of how taxes work, many miss out on significant tax reduction opportunities.

For instance, do you know how much of your property taxes are deductible? Read on to find out!

What are property taxes?

Property taxes are a type of tax that local governments impose on real estate owners. This means that your property’s assessed value dictates how much tax you’ll have to pay.

It’s important to note that property doesn’t only mean your home, but also the land it’s built on, as well as any renovations and improvements you’ve done.

Your local government collects these taxes, which it then uses to fund public projects and services (e.g., schools, firefighters, police, and road upkeep).

Additionally, each taxing jurisdiction has a separate tax rate. These rates are multiplied by your property’s assessed total value, with the result being your property tax.

Property taxes are paid annually and are always based on the most recent assessed value of your property. This means that as your property’s market value increases, so do your property taxes.

Are property taxes deductible?

The short answer is yes—property taxes are deductible on your federal income tax return. However, the Internal Revenue Service (IRS) has set limits on how much you can deduct.

How much can be deducted from your property taxes?

Since 2018, the IRS has imposed a $10,000 (or $5,000 if married and filing separately) cap on the state and local taxes (SALT) deductions. The SALT deduction limit applies to property taxes, state income taxes, and local taxes.

For example, suppose your total SALT burden is $15,500 from various sources—$10,000 from state income tax, $5,000 from property tax, and $500 from personal property taxes.

With the present cap, you can only deduct up to $10,000 on Schedule A. The remaining $5,500 becomes non-deductible and cannot be claimed as deductions in future tax years.

How to calculate property tax deductions

As mentioned earlier, the assessed value of your property directly affects its tax amount. Each property is subject to a combined mill levy, which is the total tax rate imposed by all applicable local jurisdictions.

A mill is equal to $1 in tax for every $1,000 of a property’s assessed value. This means that one mill is worth $1 for every $1,000 of a property’s assessed value.

To put it into perspective, suppose a county with an assessed property value of $100 million needs $1 million in tax revenues to fund its services. This would translate to $1 million divided by $100 million (1% levy for the county).

However, the county isn’t the only taxing jurisdiction, there are also the school district and the city.

Assuming that the school district and the city have 3% and 0.5% levies, respectively, the region’s total mill levy would add up to 4.5% (1% + 3% +0.5%), or 45 mills.

Suppose the assessment rate is set at 8%. For a property valued at $500,000, the assessed value would be $40,000. With a 4.5% mill levy, the tax due would be calculated as $1,800 ($40,000 assessed value * 4.5% mill levy).

Note: Assessment rates and methods vary by state. Some states assess based on market value, others on a fixed percentage.

How to claim property tax deductions

Property taxes have different categories with their own methods of claiming tax deductions.

Read how you can claim tax deductions for different property types below.

Personal real estate taxes

You can deduct real estate taxes for your primary residence and any other personal-use houses you may own.

You must include these claims as itemized deductions on Schedule A (part of Form 1040) and are subject to the $10,000 SALT cap.

Rental property taxes

Rental property taxes are filed through Schedule E (also a part of Form 1040). Unlike personal property real estate taxes, there is no cap for property tax deductions.

Business property taxes

You can claim tax deductions for business properties as a business expense if the property is used exclusively for business purposes and owned by you or your business entity.

This can be applicable if a warehouse or office space used in your business belongs to you.

In such cases, you can report these taxes under your business tax return using different tax forms, specifically:

• Schedule C: If your business is a sole proprietorship or a single-member LLC (limited liability company)
• Form 1120: If your business is a C corporation
• Form 1120S: If your business is an S corporation
• Form 1065: If your business is a partnership or a multi-member LLC

Business property tax deductions have no imposed limits. This means you can use 100% of your business real estate taxes to offset your business income and, consequently, decrease your income tax liability.

However, regulations may still vary per state and tax jurisdiction. If you’re unsure about your local tax rules, it’s a good idea to hire an experienced accounting virtual assistant to help you.