REG CPA Practice Questions Explained: How to Deduct Real Estate and Other Taxes

How to Deduct Real Estate and Other Taxes

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In this video, we walk through 5 REG practice questions demonstrating how to deduct real estate and other taxes, including personal property and income taxes. These questions are from REG content area 4 on the AICPA CPA exam blueprints: Federal Taxation of Individuals.

The best way to use this video is to pause each time we get to a new question in the video, and then make your own attempt at the question before watching us go through it.

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How to Deduct Real Estate and Other Taxes

Here’s a detailed overview of how taxes are deductible on an individual’s tax return.

State and Local Taxes (SALT)

Income Taxes or Sales Taxes

  • Option to Deduct: Taxpayers have the choice to deduct either state and local income taxes paid or state and local sales taxes paid during the year, but not both.
  • Who Benefits: This choice benefits taxpayers in states with no income tax or those who made significant purchases during the year.

Property Taxes

  • Deductible Taxes: Property taxes on real estate you own that are based on the assessed value of the property and charged on a uniform basis can be deducted.
  • Non-Deductible Fees: Many local benefits taxes or assessments for improvements that increase the value of your property (e.g., sidewalks, sewer lines) are not deductible.

Personal Property Taxes

  • Criteria for Deduction: Taxes on personal property, such as vehicles, can be deducted if they are assessed annually and based on the property’s value.


  • SALT Deduction Cap: The total amount you can deduct for state and local taxes (including income or sales taxes and property taxes) is capped at $10,000 ($5,000 if married filing separately).
  • Alternative Minimum Tax (AMT): Deductions for taxes, among other items, may trigger the AMT for some taxpayers, limiting the tax benefit.

Deductibility on Different Tax Schedules

  • Schedule A (Itemized Deductions): Most tax deductions, including state and local taxes, are claimed here. Taxpayers must decide whether itemizing or taking the standard deduction offers the best tax benefit.
  • Schedule C and E: Business owners and landlords can deduct state and local taxes directly related to their business or rental properties on these schedules, outside the limitations of Schedule A.


Olivia is a single taxpayer living in a state with both income and sales taxes. She owns a home, a car, and works as a freelance graphic designer. During the tax year, Olivia faces the following financial situation relevant to her tax deductions:

  • State Income Taxes Paid: $4,800
  • General Sales Taxes Paid: Estimated at $2,500
  • Additional Sales Tax from Major Purchases: $1,200
  • Property Taxes Paid on Home: $3,600
  • Vehicle Registration Fee Based on Value: $400

Olivia is trying to determine the best way to maximize her deductions related to taxes paid.

Analysis and Strategy

  1. SALT Deduction Cap: The first limitation Olivia encounters is the $10,000 cap on SALT deductions. This cap includes state and local income or sales taxes plus property taxes.
  2. Choosing Between Income and Sales Taxes:
    • With the additional $1,200 in sales taxes from major purchases, her total sales tax deduction would be $3,700.
    • Olivia decides to deduct income taxes instead of sales taxes because they are greater, even with the additional sales tax from major purchases.
  3. Total Deductible Taxes:
    • State Income Taxes: $4,800
    • Property Taxes: $3,600
    • The total is $8,400, which is under the $10,000 SALT deduction cap.
  4. Vehicle Registration Fee: Since the fee is based on the vehicle’s value and assessed annually, it qualifies as a personal property tax. This adds $400 to her deductible taxes, for a total of $8,800.

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