Real Estate Taxes: Save Money With Deductions When Filing!
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Real Estate Taxes: Save Money With Deductions When Filing!


Deidre Woollard: Nobody likes paying taxes,
especially if you live in a high-tax area of the United States. While Uncle Sam does like to get his cut,
one silver lining is that you potentially can get a nice tax deduction for
the real estate property taxes you pay. Hello, my name is
Deidre Woollard, editor of Millionacres. On today’s FAQ, we’re looking at real estate
tax deductions and what you can and can’t deduct on your taxes when it comes to your
property and real estate investments. We will cover what you need to know about
the current state of the real estate tax deduction, and how to determine whether you can
use it or not. First, the good news. Real estate taxes are
still deductible on your tax return. This includes taxes that you pay for ownership
of your primary residence, vacation home, and undeveloped land. It doesn’t include property taxes on any investment
properties you own, although that’s generally deductible in another way,
which we’ll get into later on. Before we get started, one important point
is that real estate taxes are deductible in the year they’re paid,
not in the year when they are assessed. If you get your 2019 real estate property
tax bill in October, and don’t pay it until January 2020, any real estate tax deduction
would occur on your 2020 tax return, even though the taxes were billed in 2019. Also, keep this in mind if you pay your taxes
in two or more installments: your taxes are paid when the money’s actually sent to your
local government, not in the tax year when you paid the money into your escrow account
as part of your mortgage payment. Here’s the first thing you need to
know about real estate tax deductions. To deduct real estate taxes, or any other
type of personal property taxes, you need to itemize deductions on your tax return. When you fill out your tax return, you have
two main choices when it comes to deductions. You can itemize deductions, which means you
list each deduction which you are entitled to and subtract them
from your taxable income. Or, you can choose to take the standard deduction
and use it to lower your taxable income instead. You can use whichever
is most beneficial to you. What this means is, if your itemizable deductions
are more than the standard deduction, it’s worth itemizing. If not,
you’re better off with the standard deduction. The Tax Cuts and Jobs Act dramatically
increased the standard deduction, so itemizing isn’t worthwhile for most Americans. Here’s a quick way to estimate
if you’ll be able to itemize. First, add up any of these common
itemized deductions you’re entitled to: • mortgage interest on as
much as $750,000 in principal; • medical expenses that exceed
10% of your adjusted gross income; • charitable contributions;
• state and local income and property taxes up to $10,000.
This includes your real estate taxes. More on this in the next section. Then, compare the total to
your applicable standard deduction. Here are the standard deductions
for the various tax filing statuses in 2019. That’s the federal income
tax return you’ll file in 2020. I mentioned in the previous section that state
and local property taxes are deductible, only to a maximum of $10,000.
Let’s expand on that. The deduction for state and local taxes, also
known as the SALT deduction, is one of the most popular itemizable
deductions on U.S. tax returns. In fact, before the passage of the Tax Cuts
and Jobs Act, it was the most widely used deduction by Americans
in terms of dollar value. In a nutshell, the SALT
deduction includes the following: • state and local property taxes,
including real estate taxes and taxes assessed on other personal property, such as automobiles;
• state and local income taxes; • state and local sales taxes. The major change made by the new tax law is
that the entire deduction is capped at $10,000 per return, $5,000 for
married filing separately. In other words, if you paid $6,000 in property
taxes and $8,000 in state income taxes for 2019, your SALT deduction is $10,000, not
the $14,000 you actually paid for those expenses. Here are two quick examples of how the real
estate tax deduction works in the real world. First, let’s say that you’re married and that
your joint taxable income before deductions is $100,000 for 2019. Imagine that you paid $7,000 in mortgage interest,
donated $2,000 to charity, paid $7,000 in state income taxes,
and paid $6,000 in real estate taxes. Because the SALT deduction is limited to $10,000,
your total itemizable deduction would be $19,000. You would be able to deduct the $7,000 in mortgage
interest, the $2,000 from your charitable donations, and then just $10,000, not $13,000,
for your state income and real estate taxes. Since your standard deduction is $24,400,
itemizing wouldn’t be worthwhile for you, and you wouldn’t deduct
your real estate taxes for 2019. Now, let’s do another example with the same
base assumptions — you’re married with $100,000 of taxable income, but this time, you paid
$11,000 in mortgage interest, gave $4,000 to charity, paid $5,000 in deductible medical
expenses, paid $7,000 in state income taxes, and paid $6,000 in real estate taxes. This would
give you a total of $30,000 in itemizable deductions. You would be able to deduct $11,000 in mortgage
interest, the $4,000 you gave to charity, the $5,000 you paid in deductible medical
expenses, and then $10,000, again, not $13,000, for the combination of the state income
taxes and state real estate taxes you paid. Since this exceeds your standard deduction,
it would make sense for you to itemize. If you own any investment properties and pay
taxes on them, the real estate tax deduction works a little differently. Instead of deducting it on your tax return
as an itemized deduction, you can use the property taxes you paid to offset the rental
income your property generates, just like any other operating expense. For example, let’s say you have a rental property that
generates $1,000 per month in rent, so $12,000 per year. You pay $3,000 in real estate sales tax, $5,000
in mortgage interest, and $1,000 in other operating costs. You can subtract the $9,000 in expenses to
bring your taxable rental income down to $3,000. You can then use your depreciation
deduction to reduce it even further. This isn’t subject to the
$10,000 SALT limitation. If you own a portfolio of rental properties,
you can use all the real estate taxes you pay for them to help
reduce your taxable rental income. The property tax
deduction rules discussed here, specifically the SALT limit and the standard
deductions amounts, were results of the Tax Cut and Jobs Act, which passed in late
2017 and went into effect for the 2018 tax year. Like most other provisions of this legislation
that affect individual taxpayers, these rules are currently scheduled to
disappear after the 2025 tax year. This means that unless Congress decides to
extend the changes, the $10,000 SALT deduction limit will go away, and the standard deduction
would be roughly cut in half beginning with the 2026 tax year. Additionally, depending on the outcome of
the 2020 election, the SALT deduction could be modified sooner. Remember, tax laws change over time,
and legislation became an especially fluid concept over the past few years, so the rules
could be different in the future. We will cover any upcoming
changes on the Millionacres website. If you need more information on real estate taxes,
please visit our taxes hub on millionacres.com. You can find the link for that
down in the video description. If you want more info on real estate investing,
get our free guide at real.fool.com. Thanks for watching! Be sure to like and subscribe to get more
content like this from The Motley Fool.

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