Understanding homeownership taxes

Homeownership can affect what you’ll pay in taxes, including property taxes, which are based on the value of your home and paid to your local government. But property taxes, as well as the interest you’re paying on your mortgage, may reduce your taxable income for your federal and state returns.

Consult with a tax advisor, accountant, or financial advisor regarding the impact of homeownership on your specific tax situation. 

Property taxes are set by state and local governments to pay for things like roads, schools, and police and fire departments. Here are three things to know about property taxes: 

1. Your monthly mortgage payment probably includes property taxes. Governments typically send an annual bill for your property taxes, but if your mortgage includes escrow, your mortgage lender will split that amount over 12 months and include it in your monthly mortgage payment. They’ll hold the money in your escrow account and pay the bill for you when it’s due, so you don’t have to worry about making a large one-time payment or missing the payment deadline.
2. Your home’s assessed value can change. The amount you pay in property taxes is based on your local government’s tax rate and your property’s assessed value, which is the value set by your local government’s tax assessor. It’s usually based on several factors, such as sales figures for similar homes in the area, current market conditions, and market value. Many local governments conduct reassessments of home values on a set schedule, such as every three years. If your home’s assessed value goes up, your tax bill is likely to follow. You should receive notification of any changes in your home’s assessed value in the mail, but most local governments also put this information online. If you feel your new assessment is inaccurate (for example, if it lists a renovation or addition you didn’t make), your assessment notification will include instructions on how to appeal the assessment.
3. Your local tax rate can change. Tax rates vary from municipality to municipality, and local governments can also change the tax rate either permanently or for a set amount of time. Tax rate information is generally available on local government websites.

Under federal tax law, the mortgage interest and local property taxes you pay may decrease the portion of your income that is subject to tax. To find out if these may affect your taxable income, consult with a tax advisor to calculate whether your itemized deductions (all the individual amounts that can be excluded from taxable income) total less than the standard deduction. The federal standard deduction was increased through legislation passed in late 2017, which means fewer people will have enough itemized deductions to be more than the standard deduction. If you find you don’t, your circumstances might be different in future years. 

An accountant or tax professional can help guide you. Here are three potential tax deductions to ask about: 

1. Mortgage interest: the IRS may allow you to deduct the mortgage interest you pay, depending on certain requirements. 
2. Property taxes: you may be able to deduct some or all of your property taxes; however, the state and local taxes deduction is capped for combined for property and sales/income taxes. 
3. Points: you may have paid some points (fees) at closing to help reduce your interest rate. The amount you paid in points should be listed on the 1098 statement you get from your lender. Points are generally tax-deductible on your federal return as long as you meet certain requirements. 

Consult a tax advisor regarding the deductibility of interest.