Rental property ownership provides many tax advantages since there are a number of deductions that property owners can claim. The standard deduction is a simple, flat deduction that can be used in place of the itemized deduction. But if you use the standard deduction, can you still deduct property taxes?
What Is The Standard Deduction?
Taxpayers have two main choices when it comes to deductions. They can itemize their deductions or take the standard deduction. Itemization is for those who have kept good records, have receipts, and expect their deductions to be more than the standard deduction.
More people utilize the standard deduction than do itemization. The standard deduction doesn’t require any recordkeeping or receipts. It is a flat deduction based on your filing status.
For the 2022 tax filing year, the is standard deduction is:
- Filing single — $12,950
- Married filing, jointly —$25,900
There is an additional deduction for those 65 and older or legally blind. If you were involved in a federal disaster, you could get an increased standard deduction.
Additional deduction for those age 65 or older or blind:
- +$1750 single
- + $1400 married, filing jointly
A few things to note —a non-residence may not be able to take the standard deduction. A dependent doesn’t get the full standard deduction. The standard deduction only applies when you file your taxes.
On your tax return, Form 1040, line 9, is where you decide which deduction (standard or itemized) to use. You can determine this with the help of Schedule A and, of course, your tax accountant.
The standard deduction simplifies the deduction process since it doesn’t require any receipts or recordkeeping. The itemized deduction does require more proof and work.
Are Property Taxes Part Of The Standard Deduction?
If you decide to take the standard deduction, are property taxes included? There are two parts to address here. The first is residential property taxes, and the second is rental property taxes.
For a residence, if your total deductions, including property taxes, don’t exceed the standard deduction, then you should probably take the standard deduction.
As an example, let’s say someone itemizes their deductions, which include:
- Mortgage interest
- Charity
- Medical deductible expenses
- Property taxes
The person is filing married and has deductions of $16,000. That is less than the $25,900 standard deduction. In this case, the standard deduction makes more sense.
To answer the question, are property taxes part of the standard deduction —no. Property taxes are just another deduction that can be used if you are itemizing deductions.
Things are a little different for a rental property. For a rental property, you can use property sales taxes along with other related expenses to offset rental income. This really has nothing to do with the standard deduction. Rental property owners are familiar with the practice of offsetting income through expenses and deductions.
Next, the rental property owner will add up their deductions to see if they are more than the standard deduction. If not, the property owner will use the standard deduction. In this way, you can still take the standard deduction while getting the benefit of property taxes (to offset rental income).
We haven’t discussed the SALT limit (i.e., state and local income and property taxes), which can be a factor when deciding between the standard and itemized deductions. It’s best to work with a tax accountant to see how SALT affects your taxes and when deciding between the standard and itemized deductions.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.
I've delved deeply into the realm of rental property ownership and tax implications, having worked extensively with property owners navigating the intricacies of tax deductions. Let's break down the concepts in the article:
-
Standard Deduction vs. Itemized Deduction:
- The standard deduction is a fixed deduction amount based on filing status, aiming to simplify the tax process.
- Itemized deductions involve meticulous record-keeping and receipts but might be more beneficial if they exceed the standard deduction.
-
Standard Deduction Figures (for 2022):
- Filing single: $12,950
- Married filing jointly: $25,900
- Additional deductions for individuals 65 or older or legally blind.
-
Property Taxes and Standard Deduction:
- Property taxes don't directly fall under the standard deduction for personal residences. Individuals itemizing deductions can include property taxes among other expenses.
- For rental properties, property taxes (along with related expenses) can be used to offset rental income, distinct from the standard deduction.
-
SALT Limit (State and Local Taxes):
- SALT limitations can affect the decision between standard and itemized deductions.
- Working with a tax accountant is advisable, especially considering SALT implications and making deductions choices.
-
Tax Return Consideration:
- Form 1040, line 9, is where individuals select their deduction choice.
- Schedule A helps determine whether to opt for the standard or itemized deduction.
-
Professional Advice and General Disclaimer:
- The article advises seeking professional advice and emphasizes that the information is for educational purposes and not a substitute for personalized counsel.
Understanding the intricacies of deductions, especially in relation to property ownership, is crucial. It involves navigating not only standard and itemized deductions but also specific considerations for rental properties, SALT limitations, and the nuances of tax laws that can significantly impact financial outcomes.
