Property Tax Deduction

How It Works

Property taxes paid on your primary residence, vacation home, and land can be deducted on your federal return if you itemize — but only as part of the state and local tax (SALT) deduction, which is capped at $10,000 per return ($5,000 for married filing separately). Before the Tax Cuts and Jobs Act capped SALT in 2018, high-property-tax homeowners could deduct the full amount. Now, a homeowner paying $15,000 in property taxes and $8,000 in state income taxes can only deduct $10,000 total, losing the benefit on $13,000 of taxes paid. Property tax rates vary enormously by state and locality. New Jersey has the highest average effective rate at about 2.23%, meaning a $500,000 home costs $11,150 per year in property taxes. Hawaii has the lowest at about 0.29%, or $1,450 on the same home. These differences can dwarf state income tax differences — a homeowner in New Jersey may pay more in property taxes than a similar homeowner in a "high-tax" income tax state like California. Property taxes are generally deductible in the year paid, not the year assessed, which creates a small timing opportunity at year-end. Some taxpayers prepay January property taxes in December to accelerate the deduction, though the SALT cap limits the benefit of this strategy for most filers. Rental property taxes are deducted as a business expense on Schedule E and are not subject to the SALT cap.