Property Taxes May Be Deducted From Federal Income Tax Bill

Q: In a recent column, you answered a question about whether property taxes could be deducted for an unoccupied house that was inherited for a person who also owned two other houses.

Unfortunately, you answered incorrectly, saying that the taxes could not be deducted. You confused the deduction of real estate taxes with the deduction of mortgage interest.

Mortgage interest can only be deducted for a first and second home. But there is no such limitation for deducting real estate taxes on first, second, third, or more homes, or even on real estate which is not a home, such as a vacant lot.

No doubt others will have noticed this error. I’m sure you will correct the record for the person who asked the question and for your readers in general.

A: Actually, yours was the only letter I received on this topic. But thanks for catching this error.

IRS Tax Topic 503 offers a confirmation: “Deductible real estate taxes are generally any state, local, or foreign taxes on real property. They must be charged uniformly against all property in the jurisdiction and must be based on the assessed value. Many states and counties also impose local benefit taxes for improvements to property, such as assessments for streets, sidewalks, and sewer lines. These taxes cannot be deducted. However, you can increase the cost basis of your property by the amount of the assessment. Refer to Publication 551, Basis of Assets, for more information. Local benefits taxes are deductible if they are for maintenance or repair, or interest charges related to those benefits.”

Generally, you can only deduct property taxes if you itemize on your federal income tax form. However, there is a special perk that non-itemizers may be able to take advantage of on their 2008 and 2009 tax returns.

Property tax owners who use the standard deduction will be able to take a limited property tax deduction of up to $500 for single tax payers and up to $1,000 for married couples filing jointly. The amount of the deduction is the lower of the actual property taxes you paid, or the $500/$1,000 deduction amounts.

May 21, 2009


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