TAXES & LICENSES

Real Estate Tax

If you own fixed property that is legally under your name or your businesses name, you may be subject to real estate tax. Typically, real estate tax is imposed by state and local governments on land and buildings. Your real estate tax liability will likely be calculated annually and be based on the value of your real property. The good news is that real estate taxes are deductible on your federal tax return in the year paid to state and local taxing authorities. AirBnB hosts, landlords, real estate agents and anyone taking a home office deduction should be sure not to overlook this deduction.

LANDLORD

Derek Flowers lives in Chicago, Illinois and owns a second house in Tampa, Florida (considered a rental property) which he rents out using VRBO. Derek's FL lender required he maintain an escrow account to save for real estate taxes on a monthly basis. This January, funds from his escrow account were remitted to the taxing authorities to pay for last year's real estate taxes. Even though Mr. Flowers paid into the escrow account throughout the course of last year, he cannot deduct his Florida real estate taxes until he files this year's tax return since the taxing authorities did not receive the funds until the this tax year. Since Derek does not use his second home for any personal activity, he would deduct 100% of the real estate taxes for his second home on line 16 of his Schedule E (to the extent allowed).

REAL ESTATE AGENT

House Hunter is a real estate agent who in addition to buying and selling homes for others operates nine rental properties. Mr. Hunter owns four of the rental properties, the other five homes are owned by investors who have hired him to manage their properties. When Mr. Hunter files his taxes at the end of the year he will only be eligible to deduct real estate taxes paid on the four properties he owns.

AIRBNB HOST

Lise is an active Airbnb host who owns her two story home. Lise rents the bottom half of her home (50%) frequently on Airbnb and lives on the top floor. In April of this year, Lise paid $5,000 in property taxes to her county assessor. At the end of the year when Lise prepares her Schedule E she will be able to deduct $2,500 of real estate taxes on line 16 (to the extent allowed). If Lise itemizes her deductions, she will be able to deduct the remaining $2,500 on line 6 of her Schedule A. If Lise takes the standard deduction she will not be able to deduct the personal portion of real estate taxes paid.

ENTREPRENEUR

Mercy Sterling is a speaker who has a home office dedicated to speech writing. Mercy's home office makes up 5% of her home's total square feet. Last year she paid $9,000 to her state for property taxes. When Mercy prepares her Schedule C at the end of the year, she will be able to include $450 of the real estate taxes she paid as part of her home office deduction (assuming she uses the actual calculation method).

PROFESSIONAL SERVICES

Michael Scholfield is a sole proprietor accountant who purchased a small office for his operations in July of last year and started paying the real estate taxes after the acquisition date. Mr. Scholfield is only allowed to deduct the taxes for the period he owned the property and not for the full year. Since the real estate taxes were directly related to his business office, they are deductible on line 23 of his Schedule C.

WHAT YOU NEED TO KNOW ABOUT REAL ESTATE TAXES

If the real estate taxes are paid for real property used in a business they are deductible on Schedule C, for property generating rental income Schedule E, for a tax payers personal property Schedule A (if the taxpayer itemizes deductions).
Real estate taxes are only deductible if they were directly imposed on you and you paid them during the tax year you are filing for.
If real estate property was purchased by during the year, the buyer is only allowed to deduct the taxes paid for the period she owned the property. If the seller ends up paying any portion of real estate taxes owed by the buyer, only the buyer is eligible to deduct the tax.
If you do not own your property but paid real estate taxes and are considered an equitable owner (a person who has the economic benefit and burdens of ownership) you may be eligible to deduct real estate taxes paid on your property.
Real estate taxes are broadly defined as "taxes imposed on interests in real property and levied for the general public welfare." Generally, assume that any taxes paid for a special privilege or for local benefits and improvements to increase the value of your property would be disallowed as part of the real estate tax deduction, regardless of if you take the deduction on Schedule A, C or E.

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