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Property taxes are a major expense for homeowners, and state and local taxes can be deducted if you itemize. The rules include some limits, so the deduction does not always work out as people expect.

What is deductible

Real estate taxes you pay on property you own, including your main home, a second home and land, are generally deductible if they are based on the assessed value of the property and charged uniformly across the community. The tax must be imposed on you as the owner and actually paid during the year.

What is not deductible

• Charges for services, such as trash pickup, water, sewer or other fees, even if they appear on the same bill.
• Assessments for local improvements that increase the property's value, such as new sidewalks or sewer lines. These usually add to your basis instead.
• Transfer taxes and recording fees when you buy or sell. These generally adjust your basis or sale proceeds.
• Homeowners association dues.
• Rent paid to a landlord, even if the rent covers part of the owner's property taxes.

A cap on state and local taxes

Federal law limits the total deduction for state and local taxes, which combines property taxes with state income or sales taxes. The limit has changed in recent years and is set by Congress, so check the current figure at irs.gov or ask us. For many taxpayers in higher-tax areas, this cap reduces or eliminates the benefit of the property tax deduction.

Buying or selling during the year

When property changes hands, the tax is divided between buyer and seller based on how long each owned it during the tax year. Your settlement statement shows the portion each of you paid. Be careful to deduct only your own share, and not to count amounts that are really part of your purchase cost.

Escrow accounts

If your lender pays your property tax from an escrow account, you deduct what was actually paid to the taxing authority during the year, not what you deposited into escrow. Your lender usually reports this on Form 1098, but confirm it against the county's records.

Rental and business property

Taxes on rental property or on property used in a business are generally deducted as expenses of that activity and are not subject to the same itemizing limits.

For help with Georgia property tax questions and how this deduction fits your return, contact our firm.