Real Estate Taxes

Real Estate Taxes: Key Information for Taxpayers

Real estate taxes are a critical component of personal tax planning, especially for individuals who own property, rent out real estate, or sell property. These taxes can include property taxes, capital gains on real estate sales, and deductions related to rental income. Understanding how these taxes work is essential for accurate tax filing and effective tax planning.

Property Taxes

Property taxes are levied by local governments and are typically based on the assessed value of the real estate. While these taxes are not directly reported on federal Form 1040, they may be deductible under certain conditions.

Homeowners may deduct state and local property taxes (SALT) up to $10,000 per year on their federal tax return (Form 1040, Schedule A).
Only property taxes paid on real estate used as a primary or secondary residence qualify for the deduction.
Taxes on investment properties or rental properties are generally not deductible under the SALT cap but may be deductible as business expenses if the property is used for rental income.

Capital Gains on Real Estate Sales

When you sell a property, you may realize a capital gain or loss. The gain is calculated as the difference between the sale price and the adjusted basis (original cost plus improvements minus depreciation).

For primary residences, individuals may exclude up to $250,000 ($500,000 for married couples filing jointly) of gain if they have lived in the home for at least two of the last five years.
For investment or rental properties, capital gains are taxed at ordinary income rates or long-term capital gains rates depending on holding period.
Form 8949 and Schedule D are used to report capital gains and losses from real estate sales.

Rental Property Income and Deductions

If you rent out real estate, rental income must be reported on Form 1040, Schedule E. You may also deduct expenses related to the rental property, such as mortgage interest, property taxes, repairs, and depreciation.

Deductions are limited if you use the property for personal purposes more than 14 days or 10% of rental days (whichever is greater).
Depreciation must be claimed over time (typically 27.5 years for residential rental property).
Losses from rental activities may be subject to passive activity loss rules (Form 8582).