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Deducting Real Estate Taxes: A How-To Guide

By Robert D. Flach

Editor's Note: This article is part of our 2014 Tax Tips series. Robert Flach is an expert with more than 40 years of experience as a tax professional and also blogs as The Wandering Tax Pro.

NEW YORK (MainStreet) You can deduct on Schedule A the municipal, school and county, and state and foreign, real estate taxes, based on the assessed value of real property (land and "improvements"), that you paid during the year - whether you sent the check directly to your township, municipality or county, or whether the taxes were paid out of a mortgage escrow account. There is no limit to the number of properties for which you can claim a deduction.

Charges for specific services, such as trash collection or water and sewer usage, are not deductible as real estate tax. Neither are special assessments for capital improvements that increase the value the property, like a new sidewalk. But you can deduct additional assessments to maintain public facilities, such as to repair existing sidewalks.

You can elect to "capitalize" (add to the cost basis) instead of claiming a current deduction for any real estate taxes paid on unimproved and unproductive land held for investment, such as a vacant lot. A statement of election must be attached to the original Form 1040 for the year the election is made. This election is made on an annual basis. A taxpayer can capitalize property taxes paid on a lot purchased in 2013 in 2014, 2016, and 2017 and can claim a deduction in all other years.

If you bought or sold a residence or vacation property in 2012 don't forget to include any additional real estate taxes paid as an adjustment at the closing. This is the estimated real estate tax liability that has accrued from the last regular tax payment to the date of closing. If you have prepaid real estate taxes and receive a credit adjustment at the closing you must reduce your deduction by this amount.

And also don't forget to deduct the portion of your annual maintenance fee assessment for a time-share condo, such as Disney or Marriott, which represents your share of the property's real estate taxes. This amount should be identified on the annual billing statement.

--Written by Robert D. Flach for MainStreet