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Should Property Taxes be Deductible As Charitable Contributions?

By Fuquan Bilal

As the nation comes to grips with the next tax plan, new solutions for minimizing the hit are being floated. Like, should property taxes actually be considered a fully deductible contribution to charity?

Several New Jersey towns are in favor of making things easier for residents, by allowing them to make charitable contributions instead of annual property tax payments. Under the new tax rules, only $10,000 in local, state, and property taxes (combined) are deductible on federal income tax returns. Charitable contributions have no limit. According to the New York Times, if local taxing authorities set up charitable trusts, homeowners could make annual contributions of equivalent amounts, allowing them to retain their full deduction on itemized returns.

This makes a lot of sense in other ways too. The truth is that in many ways property taxes are a form of charity. This money is used for public community programs, many of which may not be used by those that pay the taxes. Revenues can be used to help combat homelessness, build affordable housing, and provide education and health care. Plus, most people would rather help a charity than ‘pay taxes’. Who knows, it may even inadvertently create more accountability among those administering the funds.

Other states are looking for solutions in completely switching types of taxes; for example, going from relying on property taxes to payroll taxes. There could even be potential for some to finally follow the lead of other forward thinking countries and ditch annual property taxes altogether.

Individuals, and especially real estate investors can find many other ways to reduce their tax exposure this year too. That can include renovating distressed properties as affordable housing and negotiating multi-year tax breaks, and using the new pass-through provision that eliminates 20% of income for taxes for small businesses, entrepreneurs, and sole proprietorships.

Self-directed IRAs and 401ks, and 1031 exchanges all still offer investors tax deferring or tax free benefits and gains on real estate investments.

Others who don’t want to deal with the property tax debate can choose to invest in mortgage notes or funds, and simply let homeowners and borrowers deal with paying property taxes and maintenance.

Ultimately, smart homeowners and investors still have many tax saving tools at their disposal. It will also be interesting to see how local taxing authorities handle it. It may take some time to work out details, but in the end this could be a very good thing for property owners and investors.

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