Local governments typically levy property taxes, which serve as the primary funding source for those regional entities. Proceeds from property taxes pay for police and fire services, education, maintenance and construction of buildings, and local services. In most areas, property taxes are imposed on land and buildings--both residential and commercial. For example, in most states, property taxes on residential units are calculated according to the fair market value of the housing. Still, there may also be limitations or exemptions for certain citizen groups, like veterans, the disabled, and the elderly.
According to the U.S. Census Bureau, the average household pays $2,471 for property taxes annually. While some states have high rates, they may reduce or eliminate other taxes (for example, Texas has a high property tax rate but no state income tax, and New Hampshire has a hefty assessment but skips the sales tax). In other states with a lower overall assessment percentage like California, where the rate actually varies depending on the most recent sale recorded, homeowners still pay very high property taxes due to the astronomical prices being paid for homes. Finally, in a lose-lose state like New York or New Jersey, higher percentage assessments combine with high home prices to produce very high tax amounts.
What Is the SALT Limit?
While these property taxes can be deducted from federal income taxes in most cases, there are limits. One important note is that special assessments that enhance the property's value may not be subtracted. More broadly applicable, however, the Tax Cuts and Jobs Act curtailed the deduction of state and local income and property taxes (aka SALT) by limiting the eligible amount to a total of $10,000. The total applies to either single filers or a married couple filing jointly. In high-tax states, some residents pay far more than that in just property tax, without even including their income tax burden. Notably, the TCJA also limited the mortgage interest deduction, although it did positively impact some high-wealth households by reducing the number subject to the estate tax.
Can I Deduct Property Taxes on my Investment Property?
Typically, yes. The property taxes are an expense, and the costs of operating your investment property can be deducted from the income stream to reduce the amount on which you pay taxes. In addition to the property taxes, deductible items include interest, utilities, insurance, mortgage payments, maintenance, repairs, and administrative costs like advertising and tenant selection. Managing tax deductions and depreciation for investment properties is complex and challenging. Seeking the advice of a professional financial and tax advisor is a good strategy.
The income consists of the rent paid by your tenants (including security deposits or advance rent and any tenant-paid utilities). One provision of the Tax Cuts and Jobs Act that had a special carve-out for rental property owners is the QBI deduction for pass-through business owners. The act allows a reduction of 20% in the income for "pass-through" owners of active businesses and explicitly includes rental property income in the deduction eligibility. However, there is a phase-out at certain aggregate income levels, and the provision will expire in 2026 if Congress does not extend it.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.