A real estate tax is the annual charge a state or local government imposes on real property, meaning land together with the buildings and other improvements attached to it, calculated from the property’s assessed value rather than from anything the owner earned. It is the same charge most people call a property tax, and the Internal Revenue Code calls it a real property tax.
Three names for one thing is the first thing to settle, because the naming is not arbitrary and one of the three is narrower than it looks. Property tax is the umbrella: it covers the tax on real property and the separate tax some jurisdictions charge on personal property such as vehicles. Real estate tax is the half of that umbrella that reaches land and buildings, and it is the wording Schedule A uses on the return. The Code prefers real property tax, and its general rule allows a deduction for state and local, and foreign, real property taxes (26 U.S.C. 164(a)(1)).
The Code Defines the Other One
This is the detail that decides most arguments about whether a charge belongs on the line, and it works by omission.
Section 164 carries a definitions subsection, and it opens with the scope words that limit everything under it: for purposes of this section, the term personal property tax means an ad valorem tax which is imposed on an annual basis in respect of personal property (26 U.S.C. 164(b)(1)). Read what is there and what is not. The Code writes a value-based test for the personal property tax, and it writes no matching definition of the real property tax anywhere in the same subsection. What that means in practice is that whether a charge on land is a real property tax is settled first by the state or local law that imposes it, and then by the regulation’s own test rather than by a statutory definition. The value-based test itself, and the millage arithmetic that produces a bill from an assessed value, are worked through in ad valorem tax.
The regulation supplies the test the statute leaves out, and it is a test about breadth rather than about value. The real property taxes deductible are those levied for the general public welfare by the proper taxing authorities at a like rate against all property in the territory over which such authorities have jurisdiction (26 CFR 1.164-4(a)). Every clause in that sentence is doing work: general public welfare rules out a charge aimed at a benefit, a like rate rules out a charge that singles a parcel out, and all property in the territory rules out a charge whose reach is drawn around the properties that gain from it.
What Separates a Tax From a Charge on the Same Bill
A real estate tax bill routinely carries amounts that are not real estate taxes, and they sit in the same column as the amounts that are.
The regulation names the first class by what it is measured on. So-called taxes for local benefits referred to in paragraph (g) of section 1.164-2, more properly assessments, paid for local benefits such as street, sidewalk, and other like improvements, imposed because of and measured by some benefit inuring directly to the property against which the assessment is levied are not deductible as taxes, and a tax is considered assessed against local benefits when the property subject to the tax is limited to property benefited (26 CFR 1.164-4(a)). Two conditions carry that rule, and both come from the same sentence: the charge has to be imposed because of the benefit, and the group paying it has to be limited to the properties that receive it.
The same regulation opens a door back for one part of such a charge. Insofar as assessments against local benefits are made for the purpose of maintenance or repair or for the purpose of meeting interest charges with respect to such benefits, they are deductible, and in such cases the burden is on the taxpayer to show the allocation of the amounts assessed to the different purposes, and if the allocation cannot be made, none of the amount so paid is deductible (26 CFR 1.164-4(b)(1)). That last clause is the one that costs money in practice, because an unallocated bill fails entirely rather than partly.
The IRS names the second class by what it buys. An itemized charge for services to specific property or people is not a tax, even if the charge is paid to the taxing authority (IRS, Publication 530). A unit fee for the delivery of a service, a periodic charge for a residential service such as trash collection, and a flat fee charged for a single service provided by a local government are the three examples given, and none of them stops being a service charge because the county collects it (IRS, Publication 530).
Charges that are not based on value at all, and that ride on the property tax bill as assessments, are set out in non-ad-valorem taxes.
A Sale Splits the Year, Whatever the Closing Says
This is the rule most often got wrong, and the statute writes it in two limbs that have to be read together.
For purposes of subsection (a), if real property is sold during any real property tax year, then so much of the real property tax as is properly allocable to that part of such year which ends on the day before the date of the sale is treated as a tax imposed on the seller, and so much of such tax as is properly allocable to that part of such year which begins on the date of the sale is treated as a tax imposed on the purchaser (26 U.S.C. 164(d)(1)). Both limbs are the rule. The seller’s share stops the day before the sale and the buyer’s share starts on the day of the sale, so the day of sale belongs to the buyer.
The apportionment is not optional and it does not follow the money. The IRS states the consequence plainly: for federal income tax purposes, the seller is treated as paying the property taxes up to but not including the date of sale, the buyer is treated as paying the taxes beginning with the date of sale, and this applies regardless of the lien dates under local law (IRS, Publication 530). Each party is considered to have paid its own share even if one of them paid the entire amount, and each can deduct that share for the year the property is sold (IRS, Publication 530).
The statute then closes the loop by denying the other side. No deduction is allowed for taxes on real property, to the extent that subsection (d) requires such taxes to be treated as imposed on another taxpayer (26 U.S.C. 164(c)(2)). A seller who wrote the whole check does not get the whole deduction, because the buyer’s slice has been reassigned away.
Two adjacent amounts at a closing are not covered by the split. Delinquent taxes are unpaid taxes that were imposed on the seller for an earlier tax year, and a buyer who agrees to pay them cannot deduct them and treats them as part of the cost of the home (IRS, Publication 530). Money placed in escrow is the other. A homeowner can deduct only the real estate taxes that the lender actually paid from escrow to the taxing authority, not the total paid into the account (IRS, Publication 530).
Where It Lands on a Return
On an individual return the deductible state and local real estate taxes go on Schedule A, Form 1040, line 5b (IRS, Publication 530), and only for a filer who itemizes. The cap that sits above that line, and what it does to a return that would otherwise itemize, are set out in SALT deduction.
The timing rule is the one from the general rule itself, and it starts with a scope clause: except as otherwise provided in this section, the listed taxes are allowed as a deduction for the taxable year within which paid or accrued (26 U.S.C. 164(a)). So a cash-basis individual deducts what left the account in the year, and an accrual taxpayer works from when the liability is fixed. How a tax accrues on the books before it is paid is set out in accrue tax.
The land itself never gets recovered through depreciation, whatever happens to the tax on it, and the boundary between the parcel and what stands on it is worked through in can you depreciate land.
Common Questions
For land and buildings, yes. Property tax is the wider label and it covers two different charges, the one on real property and the one on personal property, which the Code defines separately as an ad valorem tax imposed on an annual basis in respect of personal property (26 U.S.C. 164(b)(1)). Real estate tax names only the first of those two. A vehicle registration charge based on value is a property tax and it is not a real estate tax.
Only some of them, and only for some filers. The general rule allows the deduction for state and local, and foreign, real property taxes (26 U.S.C. 164(a)(1)), but that allowance is then cut back for individuals: in the case of an individual and a taxable year beginning after December 31, 2017, foreign real property taxes are not taken into account under subsection (a)(1) at all (26 U.S.C. 164(b)(6)(A)), and a separate cap limits the aggregate of what is left, which is set out in SALT deduction. The charge also has to be a tax rather than an assessment or a service fee, which is what the two tests above decide.
A fundamental distinction in property law is between real property, land and things permanently attached to it, and personal property, movable items, and real property includes the surface of the land as well as permanent features above and below it, such as buildings, trees, and mineral deposits (Cornell Law School, Legal Information Institute, real property). For the most part, states have exclusive jurisdiction over land within their borders and state law governs it (Cornell Law School, Legal Information Institute, real property), which is why the charge on a parcel is defined by the jurisdiction that levies it. The other side of that line, tangible things that are not fixed to land, is worked through in tangible property.
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