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Are property taxes still deductible? It depends

Jim HamillALBUQUERQUE, N.M. — Q: Are property taxes still deductible? I heard the new tax law put some limits on tax deductions and I just bought a new house last year and at least planned to deduct the property taxes and mortgage interest.

Property taxes and mortgage interest are still deductible. But the new law has put some specific limits on property tax deductions and also made a change that may indirectly limit the tax benefits of both property taxes and mortgage interest.

First, deductions for property taxes, state income tax payments and mortgage interest are required to be reported as itemized deductions unless the property taxes relate to business or investment property.

Itemized deductions can be claimed only if they exceed a statutory amount called the standard deduction. Everyone gets a standard deduction whether they have actual allowed deductions or not. For 2017, this standard deduction was $12,700 for joint filers and $6,350 for single filers.

About 70 percent of all filers simply claimed the standard deduction because their allowed deductions did not exceed that amount. In 2017, there was no limit on the amount of property taxes or state income tax payments that could be counted as itemized deductions.

Beginning in 2018, two changes affect the ability to deduct property taxes. First, the total deduction for tax payments, including property taxes and income taxes, is limited to $10,000. Second, the standard deduction increased to $24,000 for joint filers and $12,000 for single.

This significant increase in the standard deduction means that a much smaller percentage of tax filers will be able to report itemized deductions. This is not bad because you still get the larger standard deduction to reduce taxable income.

But it does mean that there may be no incremental tax benefit to paying property taxes. Home mortgage interest is not limited unless the mortgage principal is very large, but it creates a benefit only if total itemized deductions exceed the now larger standard deduction.

I don’t know the details of your tax situation, but most people will lose any benefit of paying property taxes because the tax law already allows them to deduct $24,000 or $12,000, depending on filing status, whether they have property tax payments or not.

For readers with rental properties, the $10,000 limit does not apply to investment property taxes, and the deduction is allowed whether you can itemize deductions or not.

It is not possible to report state income tax payments as investment related. The Tax Court has held that all tax payments made by an individual are personal in nature even if they relate to income earned from an investment or a business.

So income taxes will be included in the $10,000 overall annual limit for personal taxes, and you must itemize deductions to receive any benefit.

Q: My nephew’s (very old) car broke down, and the cost to repair it would have been more than the value of the car. He needs a car to get to work, so I sold him an extra car that I have for $2,500. The car is really worth about $5,000 to $6,000. Is there any tax benefit that I can report for selling the car at a loss?

I assume that this car was a personal-use car for you. If so, any loss that you may have experienced is not tax deductible. Your loss would actually be the difference between what you bought the car for and the $2,500 sales price.

Because any decline in the value of a personal-use car relates to the benefit that you receive for that personal use, no tax deduction is allowed for the sale of personal-use assets at a loss.

The sale for less than the value means that you have made a gift to your nephew. This gift is not taxable to him because gifts may be received free of tax.

Gifts must be reported if they exceed $15,000 for the year. This limit is for each person that you may have made a gift to. The amount of the car gift is small enough that you will not have to report it unless you have made more than $15,000 of total gifts to your nephew during the year.

Jim Hamill is the director of Tax Practice at Reynolds, Hix & Co. in Albuquerque. He can be reached at jimhamill@rhcocpa.com.

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