All Real Estate Taxes are Deductible…

Well like all things tax code; not always.  In fact, many tax professionals get this one wrong too.  Further, the same mistake is pervasive on both personal residences and investment properties.

A thorough review of your real property tax bill will reveal the total is the combination of many different items and it is in those details that the answers are buried.  Let’s use a Sample Tax Record to take a closer look.  Our example property was randomly pulled from HUD foreclosure list.

Review of the tax section reveals that the total tax bill is $6,114.  The $6,114 is the total of $3,068 State/County Tax, $2,515 City Tax, and $531 Special Tax.  There is also a space for Refuse if the local jurisdiction includes that as part of the total.

The requirements to be able to deduct a real estate tax are:

1. the taxpayer must own the real estate, and
2. the deductible taxes must be based on the assessed value of the property

In our example property the State/County Tax and City Tax clearly meet the requirements of being calculated based on the assessed value of the property.  However, the Special Tax charges are not taxes based on the assessed value of the property.  If there were a Refuse charge included that would not be calculated on the property’s value either.

If this were your property and you or your tax professional look at the 1098 provided by the mortgage company at the end of the year the $6,114 would likely be reported as the deductible property taxes.  This would be incorrect as the $531 Special Tax is included and we just determined that is not deductible.

So what is included in the Special Tax charges?  These are known as special assessments and occur when; for example, your city decides to install sidewalks on your block and divides the contractor’s bill between the properties that benefit from the improvement.  There is a tax benefit to be had; however, you will not receive this benefit until you sell the property as these payments over time add to your basis in the property.

Basis is a term we have not talked about thus far on the blog.  Basis is however, the foundation for the “what” of depreciation so we will continue to use our example property next week to bring us back to the continuation of our review of all things depreciation.

Bryan L. Wakefield, MS Acct.

Principal, Corridor Tax & Accounting, LLC

1020 Philip Powers Dr., Laurel, MD 20707

Office: (410) 630-1538  | Fax: (410) 630-1652

BWakefield@CorTaxAct.com | www.CorTaxAct.com

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This U.S. Treasury Circular 230 disclosure is provided on all electronic communication to assure compliance with new standards of professional practice:

Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purposes of avoiding penalties that may be imposed on the taxpayer under the Internal Revenue Code.

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