Navigating the complexities of real estate taxes can be daunting, especially when tax season rolls around. The good news is that real estate taxes can be deductible, potentially saving homeowners a significant amount of money.

According to the National Association of Realtors, nearly 86% of homeowners took advantage of property tax deductions in 2022, underscoring the importance of understanding this valuable tax benefit.

In this blog post, we’ll break down the essentials of real estate tax deductions specifically for Washington State homeowners, providing you with a straightforward guide to answer are real estate taxes deductible and what you can deduct, how to do it, and the benefits you can reap.

Key Takeaways:

• Real Estate Tax Deductions: Understanding what qualifies and how to claim it.
• Mortgage Interest Deductions: Important details you need to know.
• Changes in Tax Benefits: Recent updates and how they impact you.
• Example of a Tax Deduction: Practical calculation for a homeowner in Washington State with an assessed value of $750,000.

What Are Real Estate Taxes in Washington State?

Real estate taxes, also known as property taxes, are levied by local governments based on the value of your property. These taxes fund public services like schools, infrastructure, and emergency services in your community. In Washington State, property taxes are a primary source of funding for local governments and school districts.

Are Real Estate Taxes Deductible in Washington State?

The short answer is yes, real estate taxes are deductible. However, there are specific rules and limits you need to be aware of to claim this deduction correctly.

Deductible Real Estate Taxes

To qualify for a deduction, the taxes must be:

1. State and Local Real Estate Taxes: These are taxes assessed uniformly at a like rate on real property throughout the community.
2. Paid by You: The taxes must be paid either at settlement or closing or directly to the taxing authority during the year.

How to Claim Your Real Estate Tax Deduction

To claim your real estate tax deduction, you need to itemize your deductions on Schedule A of Form 1040. Here’s a step-by-step guide:

1. Gather Your Records: Collect your real estate tax bills and receipts for the year.
2. Complete Schedule A: Enter the amount of your deductible real estate taxes on line 5b of Schedule A.
3. File Your Return: Submit your completed Form 1040 with Schedule A attached.

Limits on Real Estate Tax Deductions

The Tax Cuts and Jobs Act (TCJA) of 2017 introduced a cap on the deduction for state and local taxes, including real estate taxes.

The limit is $10,000 ($5,000 if married filing separately). This cap means that even if you paid more than $10,000 in state and local taxes, you can only deduct up to this limit.

Mortgage Interest Deductions

In addition to real estate taxes, you can also deduct mortgage interest on your primary and secondary residences. However, there are limits based on when you took out the mortgage and how much you borrowed.

• Loans Taken Out Before December 15, 2017: You can deduct interest on up to $1 million of mortgage debt ($500,000 if married filing separately).
• Loans Taken Out After December 15, 2017: The deduction limit is reduced to interest on up to $750,000 of mortgage debt ($375,000 if married filing separately).

What You Can’t Deduct

While real estate taxes and mortgage interest are deductible, not all expenses related to your home qualify. Here are some common nondeductible expenses:

• Homeowners Association Fees: These are not considered taxes and are therefore not deductible.
• Fire or Homeowner’s Insurance: Premiums paid for these policies are not deductible.
• Home Improvements: While these can increase your home’s basis, they are not deductible as an expense.

Example: Tax Deduction for a Washington State Home with an Assessed Value of $750,000

Let’s dive into a practical example to illustrate how real estate tax deductions work for a homeowner in Washington State. Imagine you own a home that has an assessed value of $750,000, and you earn around $150,000 a year. We’ll go through the steps to calculate and claim your deductions, assuming you have a standard tax rate.

Step 1: Understanding Your Property Tax Bill

In Washington State, property taxes are determined by local governments and are based on the assessed value of your property. Let’s assume your local property tax rate is 1.2% of your home’s assessed value.

Annual Property Tax Calculation:

• Home’s assessed value: $750,000
• Property tax rate: 1.2%
• Annual property tax = $750,000 * 0.012 = $9,000

Step 2: Mortgage Interest Deduction

Now, let’s assume you have a mortgage on your home. We’ll calculate the mortgage interest you can deduct. Suppose you took out a mortgage of $600,000 at an interest rate of 3.5% per year.

Annual Mortgage Interest Calculation:

• Mortgage amount: $600,000
• Annual interest rate: 3.5%
• Annual mortgage interest = $600,000 * 0.035 = $21,000

Step 3: Combining Property Tax and Mortgage Interest Deductions

To maximize your deductions, you’ll need to itemize them on Schedule A of Form 1040. Here’s how you would report these deductions:

Property Tax Deduction:

• Annual property tax paid: $9,000

Mortgage Interest Deduction:

• Annual mortgage interest paid: $21,000

Total Deduction:

• Property tax deduction: $9,000
• Mortgage interest deduction: $21,000
• Total itemized deduction = $9,000 + $21,000 = $30,000

Step 4: Applying the SALT Cap

The State and Local Tax (SALT) deduction, which includes property taxes, is capped at $10,000. In this example, the property tax paid ($9,000) is within the limit, so you can deduct the full amount.

Total Deductible Amount:

• Property taxes within the SALT cap: $9,000
• Mortgage interest: $21,000
• Total deductible amount = $9,000 + $21,000 = $30,000

Step 5: Impact on Taxable Income

Given that you earn around $150,000 a year, let’s see how these deductions impact your taxable income. For simplicity, we will assume a standard federal tax rate of 24% for your income bracket.

Calculating Tax Savings:

• Total itemized deductions: $30,000
• Taxable income before deductions: $150,000
• Taxable income after deductions = $150,000 – $30,000 = $120,000

Tax Savings Calculation:

• Tax savings = $30,000 * 24% = $7,200

By utilizing these deductions, you can reduce your taxable income to $120,000, resulting in a tax savings of $7,200.

Step 6: Filing Your Taxes

On Schedule A of Form 1040, you would report:

• Line 5b: State and local real estate taxes: $9,000
• Line 8a: Home mortgage interest and points reported to you on Form 1098: $21,000

Recent Updates and Changes

Mortgage Insurance Premiums: The itemized deduction for mortgage insurance premiums has expired and is no longer available for premiums paid after December 31, 2021.

Home Equity Loan Interest: Interest on home equity loans is only deductible if the loan was used to buy, build, or substantially improve your home.

Special Considerations for Washington State Homeowners

Washington State does not have a state income tax, which means residents cannot deduct state income tax payments. This makes the property tax deduction even more valuable for Washington homeowners.

Additionally, local property tax rates can vary significantly depending on the county and municipality, so it’s important to keep detailed records of all property tax payments.

Are Real Estate Taxes Deductible Summary

Understanding the ins and outs of real estate tax deductions can significantly benefit your financial situation. By knowing what you can deduct, keeping accurate records, and staying updated with tax laws, you can make the most of these deductions. Always consider consulting a tax professional to ensure you’re maximizing your deductions and complying with all IRS regulations.

*Please note that I am not a CPA or a tax professional. The examples provided here are for illustrative purposes only. For personalized advice and to ensure you’re making the most informed decisions, consult with a qualified tax professional. Happy filing!