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One of the drawbacks of owning real estate is the property taxes you will have to pay to state and local governments. Although property taxes can be bothersome and can impact your finances significantly, there are ways in which you can mitigate the effects of property liabilities. A potential option is to deduct the property tax you have paid on your federal income tax returns. 

What taxes are allowed to be deducted? 

Any taxes which are levied on real estate by state, local or foreign governments which are used to contribute to the general public welfare can be deducted from your income taxes at the federal level. However, you should be aware this does not include taxes levied for renovating your property or for services such as trash collection. Additionally, understand you can only deduct property taxes on real estate you use for personal purposes. 

Commercial and rental properties 

Since only taxes paid on property held for personal uses are eligible for deductions from your federal taxes, commercial and rental properties are excluded. If you are looking to invest in commercial or rental properties, you should keep this in mind and factor it into your financial planning strategy. Be sure to discuss this with a professional financial planner who can help you maximize your real estate investments. 

Closing costs and taxes 

Some people may not realize there are significant costs when closing a real estate transaction. There are taxes that are generally paid to either the city or county government based upon the assessment of the value of the property. Closing costs may include loan origination fees, deed recording fees, various taxes, credit report fees, title insurance and title searches. 

Generally, you can expect closing costs and taxes to equal from 2% to 5% of the property’s assessed value. Fortunately, you will be able to deduct these closing taxes on your federal tax returns. 

Delinquent taxes 

In many real estate deals the buyer will agree to pay the seller’s property taxes which were due but not paid for one reason or another. For tax purposes, these delinquent taxes are treated as a part of the cost of the home. Therefore, you will not be able to deduct these delinquent taxes from your federal taxes if you are a buyer in this situation. 

Tax Cuts and Jobs Act 

The rules and regulations regarding how much property tax you are allowed to deduct from your federal taxes is subject to change, depending upon what lawmakers collectively decide. In 2017 lawmakers decided to apply additional limitations to how much is allowed to be deducted when they passed in the Tax Cuts and Jobs Act (TCJA). The law which was passed in late 2017 took effect beginning in 2018. 

TCJA put limits on deducting not only property taxes, but all local and state taxes. The law capped how much local and state taxes you are allowed to deduct to $10,000 for unmarried individuals and $5,000 for individual married people who are filing separately. Prior to the TCJA, there was no limitation on how much of your local and state taxes you were able to deduct. 

Stay informed 

Since changes in the law regarding deductions can cause material consequences for taxpayers, it is a good idea to keep an eye on the latest developments in the applicable laws. This will allow you to plan accordingly and adjust your financial planning strategy when needed.


The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of the author and not necessarily those of Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Every investor’s situation is unique, and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.