NC Department of Revenue on Real Estate Tax Deduction

Last week, we shared the NC Department of Revenue’s responses to a series of tax questions posed by NCACPA members. We received one additional response yesterday:

Can a taxpayer deduct more than $10,000 of real estate tax on a North Carolina return? 

G.S. 105-153.5(a)(2) allows a taxpayer in calculating North Carolina taxable income to deduct from adjusted gross income either the North Carolina standard deduction amount or the North Carolina itemized deduction amount.

If a taxpayer claims North Carolina itemized deductions, G.S. 105-153.5(a)(2)(b) provides a deduction for mortgage expense and property tax.  The combined deduction may not exceed $20,000.

For purposes of the property taxes, the amount allowed as a deduction equals the amount allowed as a deduction for property taxes paid or accrued on real estate under section 164 of the Internal Revenue Code for the year.  (Emphasis added.)  For taxable years 2018 through 2025, Code section 164 limits the amount of the deduction for state and local tax (SALT) payments, including property taxes, to $10,000 ($5,000 in the case of a married individual filing a separate return).

Thus, an individual who files a North Carolina joint return with a spouse may not deduct more than $10,000 of real estate taxes paid or accrued for the taxable year as a North Carolina itemized deduction.  Importantly, if the taxpayer deducts the maximum $10,000 for real estate taxes paid or accrued during the taxable year on the State return, the taxpayer can also deduct up to $10,000 for mortgage expenses paid or accrued if the mortgage expense meets statutory requirements.

Of note, if the aggregate amount of the SALT deduction exceeds $10,000 such that the taxpayer cannot deduct the full amount of SALT payments on the federal tax return, and the amount of property tax paid during the year exceeds $10,000, the taxpayer can deduct $10,000 in real property tax paid for State tax purposes.

For example, an individual has a state income tax expense of $10,000 and a real property tax expense of $12,000.  Under federal law, the taxpayer can only claim $10,000 of the $22,000 ($10,000 + $12,000) as an itemized deduction.  Under State law, the taxpayer may claim $10,000 in real property tax paid.  If the individual instead had a state income tax expense of $10,000 and a real property tax expense of $7,000, the taxpayer is still entitled to claim a $10,000 ($10,000 + $7,000) SALT deduction on the federal tax return.  However, under State law, the taxpayer is only entitled to claim $7,000 as a North Carolina itemized deduction for real property tax paid.