For homeowners and real estate investors, tax season can bring a lot of confusion about what’s deductible and what isn’t. Terms like “property tax,” “real estate tax,” and “mortgage interest deduction” are often used interchangeably, but they refer to very different things — and understanding these differences can help you make the most of your deductions. Here’s a straightforward breakdown of each.
Property Tax vs. Real Estate Tax
First, let’s clear up the most common point of confusion: property tax and real estate tax are actually the same thing. Both terms refer to the tax levied by your local government (typically city, county, or state) based on the assessed value of real estate you own. These taxes help fund public services like schools, road maintenance, and emergency services.
When you hear “property tax” on your mortgage statement or tax bill, it’s the same as “real estate tax.” On your federal tax return, you can typically deduct up to $10,000 in combined state and local taxes (SALT), which includes property taxes, along with state income or sales taxes. However, this cap, introduced by the Tax Cuts and Jobs Act (TCJA) in 2018, limits how much property tax you can deduct if you live in a high-tax state or own multiple properties.
Mortgage Interest Deduction
The mortgage interest deduction is an entirely different benefit. When you buy a home and take out a mortgage, part of your monthly payment goes toward paying off the loan principal, and part goes toward interest. The IRS allows you to deduct the interest portion on your federal tax return — often one of the biggest deductions available for homeowners.
However, there are limits. As of 2024, you can deduct mortgage interest on up to $750,000 of qualified residence loans if you’re married filing jointly (or $375,000 if married filing separately). If your mortgage originated before December 15, 2017, you may still be grandfathered under the old $1 million limit.
This deduction applies only to mortgages on your primary home and one second home. If you have additional properties beyond that, they may not qualify unless used specifically for rental or business purposes.
Quick Summary of the Differences
- Property tax (or real estate tax) is based on the assessed value of your home and goes to fund local government services. You can deduct it as part of your state and local tax deduction, but it’s capped at $10,000.
- Mortgage interest deduction is based on the amount of interest you pay on your home loan. It reduces your taxable income based on how much interest you pay annually, up to IRS limits.
- Both deductions can help lower your overall tax bill, but they are separate and subject to different IRS rules.
Other Important Considerations
Keep in mind that to benefit from either deduction, you must itemize your deductions on Schedule A of your federal tax return. If you take the standard deduction instead, you won’t be able to separately deduct mortgage interest or property taxes.
Additionally, if you own rental properties, the rules change slightly. Property taxes and mortgage interest paid on rental homes are deductible as business expenses against your rental income, even if you take the standard deduction on your personal taxes.
Finally, if you’re paying private mortgage insurance (PMI) because your down payment was less than 20%, PMI premiums used to be deductible under certain income limits. However, the deduction for PMI has expired unless extended by future legislation. It’s a good idea to check the current tax year’s rules or work with a CPA to be sure.
Final Thoughts
Understanding the differences between property tax, real estate tax, and mortgage interest deductions can help you better prepare for tax season and take advantage of the savings available to homeowners. If you’re unsure how much you can deduct, whether you should itemize, or how to handle deductions for rental properties, it’s always smart to get advice from a qualified tax professional.
At Huddleston Tax CPAs, we help homeowners, investors, and business owners navigate the complexities of property-related deductions so they can keep more of what they earn. Ready for personalized help? Contact us today to schedule a consultation and make the most of your tax strategy.