Even if your home has no mortgage, you can deduct your property taxes. You need not have a mortgage loan with interest payments to take the property tax deduction. You can take the property tax deduction for taxes actually paid, not for those due at year's end. Be aware, however, that without mortgage interest payments to deduct, you might not have enough other deductions to make it financially worthwhile to itemize. The alternative -- taking the IRS standard deduction -- eliminates your ability or necessity to deduct property taxes on your home.
Whether you have a mortgage loan or not, you should itemize your tax deductions only when they exceed the IRS-permitted standard deduction. When homeowners have mortgage loans, their mortgage interest and property taxes alone may exceed the standard deduction amount. However, without mortgage loan interest, you may receive more benefit from the standard deduction. You should always add up your qualified deductions at year's end and compare the total with the allowed standard deduction amount, to determine which approach delivers more benefits.
Property Tax Paid
Without a mortgage loan, you may not have a property tax escrow account. However, even if you are paying a third party to escrow monies each month to meet your property tax payments, you can never deduct personal real estate taxes until they are actually paid. For example, if your property taxes are $4,000 per year, but at year's end you have paid only $1,800, you cannot deduct the total taxes due, $4,000, but only the actual amount you paid, $1,800.
Property Tax Refunds
Some localities offer various real estate tax refunds. A frequent property tax abatement or refund offered by some cities, towns and counties is a senior citizen homeowner tax rebate. With or without a mortgage, property tax refunds lower your deduction. For example, if you've paid property taxes of $4,000 in a given year, but eventually get a $500 rebate before year's end, you can deduct only $3,500, even though you have evidence of a $4,000 real estate tax payment.
Some items may appear to be property taxes, but, with or without a mortgage, they are not deductible. Prime examples are "local benefits" that are property- driven assessments. Items like installing sewer systems, although done by your local government for your home and coming with a cost, are not deductible as property taxes. Similarly, unit fees for delivery of water to your home or periodic fees for residential services, such as additional fees for government trash collection, are not deductible as property taxes. However, special assessments for maintenance and repairs, such as repairing a crumbled sidewalk, are deductible as property tax items.