The Deduction for Real Estate Taxes
Next to the home mortgage interest deduction, the most important tax break for homeowners is probably the deduction for state and local taxes, including real estate taxes.
Your real estate taxes are fully deductible, whether they are imposed by the state, county, city, township, or some other local government body.
You can deduct taxes on all your real estate - your deduction is not limited to only two principal residences, as it is with the home mortgage interest deduction. Real estate taxes you paid on all real estate you own for personal or family purposes is deductible on Line 6 of Schedule A, Itemized Deductions. However, if you own commercial or residential rental real estate, the taxes would be deducted on your Schedule E, Supplemental Income and Loss or on Form 4835 for farms, not Schedule A. See also our discussion of multi-use real estate — property that is rented out some of the time, and used for personal purposes at other times.
Deductible "taxes" do not include charges for services performed, such as a unit fee for water consumed or a periodic fee for trash removed. Taxes also don't include assessments for local benefits that tend to increase the value of your property, such as for the construction of streets, sidewalks, or sewers. Any such charges must be added to the tax basis of your property - they'll eventually reduce the amount of taxable profit on your property when you sell.
However, there is a distinction to be made between improvements and repairs. Assessments for repairs, such as repair of a broken sidewalk, or for maintenance, such as mowing, are deductible if the charges are broken out separately on your tax bill.
Who gets the deduction? The general rule is that the person who owns the real estate and, therefore, owes the taxes is the person who can deduct them, provided that he or she actually pays the amounts. Co-owners should divide the tax bill and the deduction according to the percentage of their ownership interest. If you pay taxes for someone else (for example, your aged parent) on property that they own, you cannot deduct them.
However, if you are divorced and your separation agreement or divorce decree requires you to pay real estate taxes on property owned jointly by you and your ex-spouse, the amount you pay on the ex-spouse's portion may be deductible as alimony.
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