Are Property Taxes Paid Through Escrow Tax Deductible?

Homeowners who pay their property taxes through a mortgage escrow account can generally deduct those tax payments on their federal income tax return. An escrow account is a separate account managed by your mortgage lender where a portion of your monthly mortgage payment is set aside. The lender then uses these funds to directly pay for property-related expenses on your behalf, most commonly property taxes and homeowners insurance.

Determining the Deductible Amount

You can only deduct the amount your lender actually paid to the local tax authority during the tax year. This figure is often different from the total amount you contributed to your escrow account. Lenders adjust escrow payments periodically, so the funds you set aside might be more or less than the actual tax bill. The definitive source for the deductible amount is Form 1098, Mortgage Interest Statement, which your lender sends by early February if you paid at least $600 in mortgage interest.

Your lender reports the exact amount of real estate taxes paid on your behalf, either in Box 10 of Form 1098 or on a separate statement. Not all charges on a property tax bill are deductible. The IRS only allows deductions for taxes based on the assessed value of your property. Charges for specific services, such as trash collection or water fees, or assessments for local benefits like new sidewalks, are not deductible.

Claiming the Deduction on Your Tax Return

To claim the property tax deduction, you must itemize your deductions on Schedule A of Form 1040, rather than taking the standard deduction. This choice is beneficial if your total itemized deductions exceed the standard deduction amount for your filing status. For the 2025 tax year, the standard deduction is set at $14,600 for single filers and $29,200 for married couples filing jointly.

The second requirement involves the State and Local Tax (SALT) deduction limit. The total amount you can deduct for all state and local taxes is capped at $10,000 per household per year ($5,000 for those married filing separately). This single cap includes your property taxes plus either your state and local income taxes or your state and local sales taxes, whichever is greater. You report the property tax figure on Schedule A.

Special Circumstances

Several situations can alter how you handle the property tax deduction. If you receive a refund or rebate for property taxes you deducted in a prior year, you generally must report that refund as income in the year you receive it. This is required under the tax benefit rule, which states that if a deduction resulted in a lower tax liability in a previous year, the recovery of that amount is taxable. This income would be reported on Schedule 1 of Form 1040.

If your escrow account was short and you had to pay additional property taxes directly to the tax authority, you can add these direct payments to the amount shown on your Form 1098. The total of both the escrow payments and your direct payments would be your deductible amount, subject to the SALT cap. Keep records of any direct payments as proof of payment.

When buying or selling a home, property taxes are prorated between the buyer and seller at closing. Your closing documents, such as the Closing Disclosure or settlement statement, will show the amount of taxes you were credited for or paid at the closing table. For tax purposes, the IRS treats the seller as having paid the taxes up to the date of sale, and the buyer as having paid them from that date forward, regardless of who made the actual payment to the tax authority. You can only deduct the portion of the tax that corresponds to the period you owned the home.