Intersection of Income Taxes and Property Taxes: What to Know

1 June 2025

Taxes. Nobody likes them, but they’re an inevitable part of life. If you own property, you’re dealing with not just property taxes but also the potential impact on your income taxes. Understanding the overlap between these two can help you minimize expenses and avoid any surprises come tax season.

So, how do income taxes and property taxes interact? And what should you know to ensure you’re not overpaying or missing out on deductions? Let’s break it down in simple terms.

What Are Income Taxes and Property Taxes?

Before diving into their intersection, let’s quickly define both.

Income Taxes: The Government’s Share of Your Earnings

Income tax is what you owe based on your earnings—whether from a salary, business profits, or even rental income if you own real estate. The more you earn, the more you typically have to pay, thanks to progressive tax rates.

Property Taxes: Paying for the Land You Own

Property taxes are what you pay annually for owning real estate. These taxes are determined by local governments and are based on your property’s assessed value. The money collected usually funds public services like schools, roads, and emergency services.

Now, here’s where things get interesting—these two tax types don’t exist in isolation. They often overlap in ways that can either cost you more money or save you some.

How Property Taxes Affect Your Income Tax Bill

Now for the good part—how paying property taxes can affect what you owe in income taxes.

1. Property Tax Deductions for Homeowners

If you own a home, you may be able to deduct the amount you pay in property taxes from your federal income taxes. The IRS allows homeowners to deduct up to $10,000 in state and local taxes (SALT), which includes property taxes. If you live in a high-tax area, this deduction can be a lifesaver.

But keep in mind, this deduction only applies if you itemize your deductions instead of taking the standard deduction. Since the 2017 Tax Cuts and Jobs Act increased the standard deduction significantly, fewer people itemize—so make sure it makes sense for you before going this route.

2. Property Taxes on Rental Properties

If you’re a landlord, here’s some good news: Property taxes on rental properties are deductible as a business expense. Unlike the $10,000 SALT cap for homeowners, landlords can typically deduct the full amount of property taxes paid on rental properties.

This means if you own rental properties, you can lower your taxable rental income by deducting property taxes, making real estate investment a bit more appealing from a tax perspective.

3. Selling Your Property and Capital Gains Tax

Selling real estate? You might have to deal with capital gains tax. If you sell a home for a profit, you could owe taxes on that gain.

However, if it’s your primary residence, you may qualify for an exclusion:
- Single filers: Up to $250,000 of capital gains may be tax-free.
- Married couples filing jointly: Up to $500,000 can be excluded.

To qualify, you must have lived in the home for at least two of the past five years.

For rental properties, things work differently. You may have to pay taxes on the entire gain (minus deductions like depreciation recapture), but you could defer taxes using a 1031 exchange, which allows you to reinvest profits into a new property.

How Income Affects Your Property Taxes

While property taxes are primarily based on your home’s assessed value, your income can play a role too.

1. High-Income Earners May Face Higher Property Taxes

If you live in a city where local governments seek additional funding, homeowners with higher incomes may see increased property taxes since some areas adjust tax rates based on income brackets.

2. Tax Relief Programs for Low-Income Homeowners

If you’re a senior citizen, disabled, or have a lower income, you might qualify for property tax relief programs. Some states offer homestead exemptions, which reduce your taxable home value, effectively lowering your property taxes.

Additionally, some areas provide property tax deferral programs, allowing eligible homeowners to postpone payments until they sell their home or pass away.

It’s worth checking with your local tax assessor’s office to see what programs are available in your area.

Common Mistakes to Avoid in Managing Income and Property Taxes

Nobody wants to pay more than they have to, but mistakes happen—often because tax laws can be confusing. Here are some pitfalls to watch out for:

1. Forgetting to Claim Property Tax Deductions

Many homeowners forget they can deduct property taxes (within the $10,000 SALT limit). Always keep track of your payments and see if itemizing deductions makes sense for you.

2. Overlooking Rental Property Deductions

Landlords often miss out on deductions beyond just property taxes. Mortgage interest, maintenance costs, depreciation, and even travel expenses related to property management can be deducted. Missing out on these could mean leaving money on the table.

3. Ignoring Reassessment Appeals

If your property tax bill suddenly spikes, don’t just accept it—you can appeal your home’s assessed value. Many homeowners successfully challenge overvaluations by providing evidence that similar homes in the area are valued lower.

4. Failing to Consider a 1031 Exchange When Selling an Investment Property

Selling an investment property without reinvesting could lead to a hefty tax bill. A 1031 exchange allows you to defer capital gains taxes by swapping one investment property for another of equal or greater value.

Conclusion: Plan Smart to Pay Less

Understanding the relationship between income taxes and property taxes isn’t just a theoretical exercise—it can save you thousands of dollars.

Whether you’re a homeowner looking to maximize deductions, a landlord seeking ways to reduce taxable rental income, or a seller aiming to minimize capital gains tax, a little planning goes a long way.

The key? Stay informed, keep records of tax-related expenses, and when in doubt, consult a tax professional to ensure you’re making the most of available deductions and exemptions.

After all, the less you pay in taxes, the more you can put toward your next big financial goal—whether that’s upgrading your home, investing in more real estate, or simply enjoying life a little more.