Real Estate Taxes, also known as "Property Taxes", are taxes paid yearly on the value of the real property by most state and local government. They are deductible tax breaks for homeowners.

Deductible tax breaks lowers the homeowners tax liability. Increasing the real estate deduction means lowering the tax liability of the homeowner for the current year.

Most state and local governments charge an annual tax on the value of real property. This is called a real estate tax. A homeowner may deduct the real estate tax if it is based on the assessed value of the real property and the taxing authority charges a uniform rate on all property in its jurisdiction.

Deductible Real Estate Taxes

A homeowner is entitled to deduct real estate tax payments on his/her property if itemized deductions are claimed on the tax return. The IRS allows a homeowner to deduct real estate taxes on his/her main home and any other home he/she owns. There are no limits on the dollar amount of deductible real estate taxes as well as no limits on the number of houses for which a homeowner can claim the deduction.

The payments of state, local, or foreign real estate taxes on a non-business property are deductible. It must be paid during settlement or closing, or to a tax authority during the year.

Real Estate Taxes included in Mortgage Payment

Included in the monthly mortgage payment to a bank or other mortgage holder generally includes amounts allocated to real estate taxes. The bank will pay the real estate taxes to the proper taxing authority on their due date. If the real estate taxes are included in the mortgage payment, the homeowner may claim a deduction only in the tax year he/she actually pays taxes. A homeowner can check the year end statement the lender sends to determine if they paid the tax collector the same year that the homeowner paid taxes to the lender.

Real Estate Taxes Paid at Settlement or Closing

Real estate taxes are generally divided so that the buyer and the seller each pay taxes for the part of the property tax year the buyer and seller owned the home. The share of these taxes is fully deductible, if itemized in the deductions.

Division of Real Estate Taxes

For federal income tax purposes, the seller is treated as paying the property taxes up to, but not including, the date of sale. The buyer is considered as paying the taxes starting with the date of sale. This applies regardless of the lien dates under local law. Generally, this information is included on the settlement statement the buyer gets at closing.

The buyer and the seller each are considered to have paid their own share of the taxes, even if one or the other paid the entire amount. Both can deduct their own share, if itemized in the deductions, for the year the property is sold.

For example, Greg Enriquez purchased a home on August 1. The property tax year (the period to which the tax relates) in your area is the calendar year. The tax for the year was $2000.

Greg owned the home from August 1 to December 31, including the date of purchase or 152 days for the given tax year. Greg will determine his deduction for real estate taxes on his home as shown below:

Computation of the Total Real Estate Taxes for the year

Multiply the tax for the year which is $2000 by the number of days Greg owned the property divided by 365 days. Same goes for the seller.

$2000 x (152 days/365 days) = 832.88 dollars

Greg may deduct $832.88 on his tax return for the year if he itemizes his deductions. He is considered to have paid this amount and can deduct it on his return even if, under the contract, he did not have to reimburse the seller.

Prorated Real Estate Taxes

When a buyer purchases a property, he/she will more than likely have to pay prorated real estate taxes. They are prorated because the IRS treats the seller as paying the real estate taxes up to the date of the sale and treats the buyer as paying the taxes beginning with the date of sale.

Delinquent Property Taxes

Delinquent taxes are unpaid taxes that were imposed on the seller for an earlier tax year. If a buyer agrees to pay delinquent taxes when he/she buys a home, he/she cannot deduct them. They will be treated as part of the cost of your home.

Escrow Accounts

Many monthly house payments include an amount place in escrow for real estate taxes. They are place in the care of a third party. A seller may not be able to deduct the total amount paid by the buyer into the escrow account. The seller can only deduct the real estate taxes that the lender actually paid from escrow to the taxing authority. The buyer’s real estate tax bill will show this amount.