Real Estate-Related Items You Cannot Deduct
Payments for the following items generally are not deductible as real
estate taxes.
- Taxes for local benefits.
- Itemized charges for services (such as trash and garbage pickup fees).
- Transfer taxes (or stamp taxes).
- Rent increases due to higher real estate taxes.
- Homeowners' association charges.
Taxes for local benefits. Deductible
real estate taxes generally do not include taxes charged for local benefits and
improvements that increase the value of your property. These include assessments
for streets, sidewalks, water mains, sewer lines, public parking facilities, and similar
improvements. You should increase the basis of your property by the amount of the
assessment.
Local benefit taxes are deductible only if they are for maintenance, repair, or
interest charges related to those benefits. If only a part of the taxes is for
maintenance, repair, or interest, you must be able to show the amount of that part to
claim the deduction. If you cannot determine what part of the tax is for maintenance,
repair, or interest, none of it is deductible.
Taxes for local benefits may be included in your real estate tax bill. If your taxing
authority (or mortgage lender) does not furnish you a copy of your real estate tax bill,
ask for it. You should use the rules above to determine if the local benefit tax is
deductible.
Itemized charges for services. An
itemized charge for services to specific property or people is not a tax, even if the
charge is paid to the taxing authority. For example, you cannot deduct the charge
as a real estate tax if it is:
- A unit fee for the delivery of a service (such as a $5 fee charged for every 1,000
gallons of water you use),
- A periodic charge for a residential service (such as a $20 per month or $240 annual fee
charged to each homeowner for trash collection), or
- A flat fee charged for a single service provided by your government (such as a $30
charge for mowing your lawn because it was allowed to grow higher than permitted under
your local ordinance).
 You must look
at your real estate tax bill to determine if any nondeductible itemized charges, such as
those just listed, are included in the bill. If your taxing authority (or mortgage lender)
does not furnish you a copy of your real estate tax bill, ask for it.
Exception. Service charges used to maintain or improve
services (such as trash collection or police and fire protection) are deductible as real
estate taxes if:
- The fees or charges are imposed at a like rate against all property in the taxing
jurisdiction,
- The funds collected are not earmarked; instead, they are commingled with general revenue
funds, and
- Funds used to maintain or improve services are not limited to or determined by the
amount of these fees or charges collected.
Transfer taxes (or stamp taxes). Transfer taxes and similar taxes and charges on the sale of a personal home
are not deductible. If they are paid by the seller, they are expenses of the sale
and reduce the amount realized on the sale. If paid by the buyer, they are included in the
cost basis of the property.
Rent increase due to higher real estate taxes. If your landlord
increases your rent in the form of a tax surcharge because of increased real estate taxes,
you cannot deduct the increase as taxes.
Homeowners' association charges. These charges are not deductible
because they are imposed by the homeowners' association, rather than the state or local
government.
Personal Property Taxes
Personal property tax is deductible if it is a state or local tax
that is:
- Charged on personal property,
- Based only on the value of the personal property, and
- Charged on a yearly basis, even if it is collected more than once a year, or less than
once a year.
A tax that meets the above requirements can be considered charged on personal property
even if it is for the exercise of a privilege. For example, a yearly tax based on value
qualifies as a personal property tax even if it is called a registration fee and is for
the privilege of registering motor vehicles or using them on the highways.
Example. Your state charges a yearly motor vehicle registration
tax of 1% of value plus 50 cents per hundredweight. You paid $32 based on the value
($1,500) and weight (3,400 lbs.) of your car. You can deduct $15 (1% × $1,500) as a
personal property tax, since it is based on the value. The remaining $17 ($.50 × 34),
based on the weight, is not deductible.
Taxes and Fees
You Cannot Deduct
Many federal, state, and local government taxes are not deductible
because they do not fall within the categories discussed earlier. Other taxes and
fees, such as federal income taxes, are not deductible because the tax law specifically
prohibits a deduction for them.
Taxes and fees that are generally not deductible include the following items.
- Estate, inheritance, legacy, or succession taxes. These taxes are
generally not deductible. However, you can deduct the estate tax attributable to income in
respect of a decedent if you, as a beneficiary, must include that income in your gross
income. In that case, deduct the estate tax as a miscellaneous deduction that is not
subject to the 2%-of-adjusted-gross-income limit. For more information, see chapter 4.
- Federal income taxes. This
includes taxes withheld from your pay.
- Fines. You cannot deduct penalties for violation of any law, including
forfeiture of related collateral deposits.
- Gift taxes.
- License fees. You cannot deduct license fees
for personal purposes (such as marriage, driver's, and dog license fees).
- Social security. This includes social security, Medicare, or railroad
retirement taxes withheld from your pay.
- Social security and other employment taxes for household workers. You
generally cannot deduct the social security or other employment taxes you pay on the wages
of a household worker. However, you may be able to include them in medical or child care
expenses. For more information, see chapters 23 and 33.
Many taxes and fees other than those listed above are also nondeductible, unless they
are ordinary and necessary expenses of a business or income producing activity. For other
nondeductible items, see Real Estate-Related Items You Cannot Deduct, earlier.
Where To Deduct
You deduct taxes on the following schedules.
State and local income taxes. These
taxes are deducted on line 5 of Schedule A (Form 1040), even if your only source of income
is from business, rents, or royalties.
Foreign income taxes. Generally,
income taxes you pay to a foreign country or U.S. possession can be claimed as an
itemized deduction on line 8 of Schedule A (Form 1040), or as a credit against your U.S.
income tax on line 45 of Form 1040. To claim the credit, you may have to complete and
attach Form 1116. For more information, see chapter 38 or the instructions for Form 1040
or get Publication 514.
Real estate taxes and personal property taxes. These taxes are deducted on lines 6 and 7 of Schedule A (Form 1040), unless
they are paid on property used in your business in which case they are deducted on
Schedule C or Schedule F (Form 1040). Taxes on property that produces rent or royalty
income are deducted on Schedule E (Form 1040).
Self-employment tax. Deduct
one-half of your self-employment tax on line 29, Form 1040.
Other taxes. All other deductible taxes are deducted on line 8 of
Schedule A (Form 1040).
- Continue - |
