Tax Tip: Real Estate Deductions

Editor’s Note: This article is part of our 2012 Tax Tips series. Robert Flach is an expert with almost 40 years of experience as a tax professional and also blogs as The Wandering Tax Pro.

NEW YORK (MainStreet) – Municipal, school, county, state and foreign real estate taxes based on the assessed value of real property (land and “improvements”) are deductible in the year they are paid – whether you send the check directly to your township, municipality or county or they are paid out of a mortgage escrow account.

You can deduct the real estate tax paid on all of the properties that you own, including unimproved lots. There is no limit to the number of properties on which you can claim a deduction for real estate taxes on Schedule A.

Charges for specific services, such as trash collection or water consumption, are not deductible as real estate tax. Neither are special assessments for capital improvements that will increase the value of local real estate, like for a new sidewalk. However, additional assessments to maintain existing public facilities, such as to repair existing sidewalks, are deductible.

Instead of claiming a current deduction you can elect to “capitalize” (add to the cost basis) any real estate taxes, or mortgage interest, paid on unimproved and unproductive land (a vacant lot) held for investment. Doing this will reduce the taxable gain, or increase the loss, when you sell the lot.

The election can be made on an annual basis. You can choose each year whether to capitalize or claim the deduction. You can capitalize the taxes on a lot in 2011, 2013 and 2015, and claim a tax deduction in all the other years. A statement must be attached to the original Form 1040 for each year that the election is made.

So in a year that you are not able to itemize you won’t lose the tax benefit of the real estate taxes, and you can maximize deductions in a high income year.