Can You Write Off Taxes on a House Without a Mortgage?

Michael Marz for Demand Media writes: Most homeowners who are paying off a mortgage take advantage of the mortgage interest and real estate tax deductions. However, the two deductions are unrelated, and there's no reason why you can't take one without the other. So if your home is paid off already, you might save some money by writing off your local property taxes if it's beneficial for you to itemize instead of taking the standard deduction.

DEDUCTIBLE PROPERTY TAXES

In most jurisdictions, the local government charges homeowners a property tax that's calculated based on a uniform rate multiplied by each home's value. If you pay these property taxes on your home each year, and you don't receive special services or privileges for it, you can deduct all payments on your federal tax return each year. The only other requirement for taking the deduction is that you be the person who is legally responsible for the tax payments. Therefore, if you pay the property taxes for a friend, relative or even your landlord if it's part of a lease agreement, you can't take the deduction.

NONDEDUCTIBLE TAXES

Other taxes or fees you pay to your local government that don't qualify for the deduction might be bundled with your property tax payments, so when preparing your tax return, you might need to determine which payments are deductible property taxes and which are not. Commonly, these payments will be for things such as garbage collection and water usage fees. You might also make payments to your local government for special projects that actually increase the value of your home, which are also nondeductible. For example, if your city decides to build a sidewalk on your block and assesses a one-time tax on you and your neighbors, you can't include the payment in your property tax deduction.

YEAR OF SALE

If you just purchased a house for cash, inherited it or are ready to put it up for sale, the property taxes that you're responsible for paying in the first or last year of ownership can still be deducted. However, regardless of any agreement you have with the buyer or seller to pay the property taxes during any period you're not the legal owner, none of those payments are deductible to you. The tax law only allows the deduction for those months you're liable for the property tax payments. Therefore, if the property taxes on your house are $1,000 per month, and you transfer title to the home on September 1, you can only deduct $8,000, even if you actually pay for the full year.

SCHEDULE A REQUIRED

Because the only way to take the deduction for property taxes is on Schedule A, you must elect to itemize your deductions. But depending on how much your property taxes are and what your filing status is, the standard deduction might end up saving you more in tax than itemizing. And in the absence of a mortgage, which for many taxpayers is the source of a substantial itemized deduction, you might need other deductible expenses such as charitable contributions, job-related expenses and state income taxes to bring the total on Schedule A high enough to surpass the standard deduction.