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LendingTree looks at real estate taxes in the nation’s largest metropolitan areas

Even if you’ve been procrastinating, the tax filing deadline is right around the corner. As a result, homeowners need to make sure they’re educated about the ways owning a home can impact the taxes they pay and what they need to do to get their maximum refund.

LendingTree, the nation’s largest online loan marketplace, took the upcoming tax deadline as an opportunity to look at how owning real estate impacts people in different areas around the country. Our study looked at the average amount of real estate taxes (sometimes colloquially referred to as “property taxes”), mortgage interest, and mortgage insurance premiums that were paid by homeowners in a given metro, as reflected on their tax returns. It then ranked the nation’s 50 largest metros to show where people paid the lowest taxes on their homes.

The purpose of our study is not only to show where real estate taxes are the lowest, but also to help familiarize the average person with a few key elements present in the 2017 Trump tax bill. That way, homeowners will not only have a better understanding of what their tax burden is like, compared to other people from around the country, but they will also have a better idea of the kinds of steps they need to take to maximize their tax refund.

Key findings

People from metros in more rural states tend to pay less in real estate taxes. Homeowners in Birmingham, Ala., Louisville, Ky., and Salt Lake City pay an average of $2,600 on real estate taxes, which is the lowest out of the nation’s 50 largest metros.

Those who live in metros in more heavily-populated and urban states tend to pay higher real estate taxes. Homeowners in New York, San Jose, Calif., and San Francisco paid an average of $9,400 in real estate taxes, close to double the average amount paid across the 50 largest metros.

The average amount of mortgage interest paid across all metros is about $8,500. People who pay high yearly interest costs on their mortgage might benefit from itemizing their tax returns. As a result, if you want to make sure you’re saving the most on your taxes, you should pay careful attention to how much mortgage interest you are paying.

The average mortgage insurance premium charged to someone living in one of the nation’s largest metros is about $1,600. As with mortgage interest, people who pay high mortgage insurance premiums can sometimes save on their taxes by itemizing. That being said, most homeowners will likely be better off by trying to avoid paying mortgage insurance premiums all together — they can do this by having equity of 20% or higher in their home.

Relatively few Americans itemize their tax returns because they either save more by taking the standard deduction or find taking it more convenient. People who pay very high property taxes, mortgage interest and/or mortgage insurance premiums can sometimes save more by not taking the standard deduction and instead itemizing their tax returns, but this usually isn’t the case. Consequently, this is why around 7 in 10 federal tax returns filed don’t contain any specific info on things like real estate taxes or mortgage interest paid.

Metros with the lowest real estate taxes

Birmingham, Ala.

% of returns with real estate taxes: 26.5%

Average real estate tax amount: $2,035

% of returns with mortgage interest paid: 24.0%

Average mortgage interest paid: $7,455

% of returns with mortgage insurance premiums paid: 4.1%

Average mortgage insurance premium amount: $1,200

Louisville, Ky.

% of returns with real estate taxes: 27.7%

Average real estate tax amount: $2,733

% of returns with mortgage interest paid: 24.2%

Average mortgage interest paid: $6,297

% of returns with mortgage insurance premiums paid: 4.3%

Average mortgage insurance premium amount: $1,227

Salt Lake City

% of returns with real estate taxes: 31.1%

Average real estate tax amount: $2,765

% of returns with mortgage interest paid: 27.8%

Average mortgage interest paid: $8,328

% of returns with mortgage insurance premiums paid: 6.6%

Average mortgage insurance premium amount: $1,758

Metros with the highest real estate taxes

New York

% of returns with real estate taxes: 28.7%

Average real estate tax amount: $10,202

% of returns with mortgage interest paid: 23.2%

Average mortgage interest paid: $9,868

% of returns with mortgage insurance premiums paid: 1.49%

Average mortgage insurance premium amount: $2,076

San Jose, Calif.

% of returns with real estate taxes: 32.7%

Average real estate tax amount: $9,626

% of returns with mortgage interest paid: 28.0%

Average mortgage interest paid: $15,044

% of returns with mortgage insurance premiums paid: 0.6%

Average mortgage insurance premium amount: $2,408

San Francisco

% of returns with real estate taxes: 31.8%

Average real estate tax amount: $8,493

% of returns with mortgage interest paid: 27.6%

Average mortgage interest paid: $14,496

% of returns with mortgage insurance premiums paid: 1.0%

Average mortgage insurance premium amount: $2,329

What does the Trump tax bill mean for homeowners?

As was the case before the Tax Cuts and Jobs Act of 2017 was passed, people need to itemize in order to get a deduction based on things like their real estate taxes, or the amount of money they pay in mortgage interest.

While itemization can save some people money, it is also more of a hassle than taking the standard deduction is. Furthermore, many people will likely save the same, if not more, by just taking the standard deduction.

In order to make itemizing a tax return worth it, a person’s deductible expenses must be higher than their standard deduction. As of 2017, the standard deduction amount for single taxpayers is $12,000, $24,000 for married taxpayers filing jointly, and $18,000 for heads of households.

There are limits to how much people can deduct for home related expenses, even if they itemize their tax returns. The total amount that can be deducted for all state and local taxes, which includes real estate taxes, is $10,000, or $5,000 for married people filing separately.

While higher refunds issued under the Trump tax bill can help people who are struggling to pay for real estate taxes or mortgage interest costs, there are better ways to manage these kinds of costs. Ultimately, people who feel as though they are chronically overburdened by high real estate taxes or mortgage interest fees are better off looking at alternative ways of ease this burden, as opposed to solely relying on their federal tax refund. For example, moving to a less expensive area like Birmingham, Ala., can help alleviate costs associated with owning a home. Furthermore, techniques like refinancing can also help lower overall mortgage costs.

Methodology

This study uses data from individual (form 1040) tax returns compiled by the Statistics of Income (SOI) division of the IRS to rank the nation’s 50 largest Metropolitan Statistical Areas (MSAs) by the average amount of real estate taxes paid in those areas. The IRS sorts this data on a zip code level, but LendingTree transformed it to reflect the MSA level. The latest year the data is available for is 2016, which is why our study focuses on that year.

The IRS uses the term “Real Estate Tax” to define tax that is charged on immovable property, like houses, buildings, or land. This term is often referred to as “property tax,” but since that is not the term the IRS uses, it is not the term this study uses.

To find the percentage of returns that listed real estate taxes, mortgage interest payments and mortgage insurance premium payments, we divided the number of returns that listed those categories from the total number of returns in an area.

To find the average amount of real estate taxes, mortgage interest and mortgage insurance premiums paid in an area, we divided the total amount of money generated in those categories in a given metro, from the number of returns filed in those metros that contained those categories. For example, in Birmingham, Ala. there were 134,000 returns filed that contained info on real estate taxes, and the total real estate tax amount listed on those returns amounted to $272,730,000. Therefore, by dividing $272,730,000 by 134,000 we were able to determine that the average amount of real estate taxes paid in that area was approximately $2,035.

 


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