Which Property Taxes are Deductible?

Raziel Ungar

September 14th, 2011 - 2 min read
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As you may know, your annual real estate tax bill is an itemized deduction for federal and California income tax purposes and lowers your annual income tax bill (unless the alternative minimum tax applies to you). The general property tax rate throughout California is limited to one percent of the property's assessed value. However, due to direct levies and special assessments in some areas, the overall property tax rate may be slightly higher. The rule of thumb for budgeting purposes is 1.25%.

photo by r-z - Creative Commons 2.0
The deductibility of property taxes acts as a subsidy for homeownership.  For example, if you itemize your deductions and your deduction for property taxes this year is $10,000 your potential income tax savings for federal and California could be as high as approximately $4,500 depending on which tax brackets you are in.
Local Benefit Asessments

Homeowners are often required to pay assessments for public improvements such as sewers, streets, lighting, etc. Other benefits could include a parcel tax (in Burlingame, for example, parcel taxes have been passed to directly support capital improvements in the Burlingame School District). You get no deduction for these payments if the properties subject to assessment are limited to the properties directly benefiting from the improvement thus, for example, if street lights are installed in one area of a county and only those properties in that area of the county incur a special assessment, the portion of those taxes paid aren't deductible. Conversely, a property tax increase for an entire county imposed to pay off bonds to build a sewage disposal system would be deductible. As a homebuyer, to identify exactly which local assesments are in play for a home you're thinking about buying, you can usually find the appropriate information in the back of the natural hazards report (provided by the seller by law, and prepared by companies such as Property ID or JCP).

Fortunately all is not lost if a portion of your property tax bill is not currently deductible.  If a benefit assessment isn't deductible it can be added to the basis of your property.  The increased basis can save you taxes when you sell the property; so save your records.

About the Author
Benjamin Lewis Lesser, CPA is the owner of First Peninsula Accounting, a public accounting practice in San Mateo. Ben provides tax and accounting solutions to bay area business and individual clients with a niche expertise working with healthcare and medical professionals.

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