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Deductibility of local benefit assessments and personal property taxes (MS Word)

Deductibility of local benefit assessments and personal property taxes (.pdf)

 

Deductibility of local benefit assessments and personal property taxes

Dear Reader:

You are no doubt aware that your regular annual real estate tax bill is deductible for federal income tax purposes (unless the alternative minimum tax applies to you). If you pay other types of “property” taxes, however, the rules on their deductibility may not be as clear.

Local benefit assessments. Property owners are often required to pay assessments for public improvements such as sewers, streets, lighting, etc. You get no deduction for these payments if the properties subject to assessment are limited to the properties benefiting from the improvement (as opposed to regular, deductible, property taxes which are levied for the general welfare at a like rate on all properties in the jurisdiction). If the improvement tends to increase the value of assessed property, you get no deduction. (Note that even if you bring in appraisals or other proof that the benefit didn't actually increase your property's value, you will lose if it is the type of benefit that “tends” to increase value.)

Thus, for example, if a sewer line is installed in one area and only those properties in the area incur a special assessment, those taxes paid aren't deductible. Conversely, a property tax increase for an entire municipality imposed to pay off general revenue bonds to build a sewage disposal system would be deductible.

If a benefit assessment isn't deductible because it tends to increase property value, it can be added to the basis of the property. Be careful to maintain records on any assessment. The increased basis can save you taxes when you sell the property.

Additionally, taxes paid to cover the costs of maintaining or repairing the local benefit, or to cover related interest costs, are deductible. Thus the assessment for installing a benefit may not be deductible while later assessments to maintain it can be.

Personal property taxes. Some jurisdictions impose property taxes on personal property (i.e., property other than real estate). These taxes are deductible for federal income tax purposes (again, unless the alternative minimum tax applies) if they are imposed annually and are ad valorem, i.e., are based on the value of the taxed property. So, for example, states that impose an annual fee on cars based on value are charging a deductible property tax. But if it's not annual, or is based on something like vehicle weight, it's not deductible. If it's a combined weight/value based tax, it may be partially deductible.

If you are paying a local benefit assessment or other type of property tax and aren't sure of its deductibility under the above rules, please call and we will be happy to provide you with guidance on the matter.