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Benjamin Franklin was famous among other things for saying "in this world nothing can be said to be certain, except death and taxes." When it comes to Real Estate Taxes that ideology goes double considering the ever changing parameters of local, state and federal regulations. Since tax time is around the corner it's best to arm yourself with knowledge whether you are a Real Estate Agent, Homeowner or an Investor.
One of the great mis-perceptions about property taxes is when to actually pay them. To be able to claim a deduction on your Real Estate Taxes for a given year, those taxes must be paid during that tax year. Many a homeowner finds this out after the close of the tax year, usually when they wait until the last minute to file prior to Tax Day in April. Popular deductions are often attempted for local, and state assessments, local benefits and improvements to the property to raise the value. Other common deductions are taxes on tenant shareholders of a co-op, foreign real estate taxes and personal property taxes under certain cases.
The IRS is very clear about what is absolutely not deductible as real estate taxes. You may not deduct for itemized charges for services (such as trash and garbage pickup fees), transfer taxes, increases in rent due to higher taxes, Homeowners' association charges or other taxes deemed a "local benefit". Many states dictate that to complete a home sale that the buyer and seller must split the taxes evenly unless the transaction is paid for completely in cash.
Although certain portions of the tax codes don't change from year to year the upcoming election cycle will have a bearing on future tax rates. With the Bush tax cuts potentially expiring for good after 2012 and President Obama's recent proposal that individuals, trusts and estates would revert back to higher tax levels such as a maximum tax rate on income of 39.6% and capitol gains tax of 20%. This could have a direct impact, especially on the housing market as it tries to recover and investors (whom the government is banking on to buy distressed homes in bulk) could suffer as well.
The IRS has a basic method for figuring out your Real Estate Tax Deduction in a given year: a) Enter the total real estate taxes for the real property tax year, b) Enter the number of days in the real property tax year that you owned the property, c) Divide line 2 by 365 (for leap years, divide line 2 by 366), d) Multiply line 1 by line 3. This is your deduction. Enter it on Schedule A (Form 1040), line 6. Repeat these steps for every property bought or sold last year. Please note: this is based on a basic 1040 tax form and may not apply to everyone. Always consult your professional tax preparer with any questions concerning your taxes.
The IRS has several publications and resources available for any other in depth questions you may have about how properly account for property taxes and deductions.