If you're thinking about starting a real-estate investment portfolio, it's important to understand how taxes work in the United States. In this article, we'll cover what you need to know about real-estate investing taxes and how they can affect your bottom line.
We'll start by explaining how property taxes work in general, then talk about how they apply to rental properties. We'll also discuss the tax implications when selling your property and investing in new properties.
The Importance of Understanding Property Taxes
Property owners pay property taxes to local governments on their homes or commercial properties, such as office buildings or apartments. Property taxes are based on the assessed value of the property currently owned by the homeowner or landlord (or corporation). The assessed value is determined by multiplying the fair market value (FMV) of the property by a percentage figure that represents an equalization factor based on local demographics (e.g., school district). This assessment is done every year by city assessors and approved by local courts for accuracy purposes; it's required for property owners to pay their annual property tax bill each year.
Property taxes are paid through quarterly installments throughout a three-year period called Real-estate investing can make you a great deal of money, but it also comes with a lot of tax consequences, especially if you are an investor who owns real estate in multiple states. Here's what you need to know about real-estate taxes.
Real Estate Taxes: The Basics
Real estate taxes are normally paid by the person or business that owns the property, not necessarily by the owner of the property itself (like your home). If you own a rental property and pay taxes on it, then those taxes will be reported on your personal tax return at year-end. If you sell that property, however, then those same taxes will be reported as capital gains when you sell it — not income from wages or other sources.
When Do Real Estate Taxes Occur?
Real estate taxes only occur when there is a change in ownership from one person or business to another. For example, if you buy a house for $200,000 and then sell it for $300,000 within two years of purchase, there has been no change in ownership between you and your former landlord. You can simply report all $200K as income on your annual tax return.
Real estate investing taxes is the source of confusion for many traders and investors. The reason behind this is that it is a complex field to understand, even for tax professionals. The first step in understanding real estate investing taxes will be to understand what types of properties are considered taxable and what are not. In short, every type of property makes for an attractive investment opportunity. However, there are some things which add to the confusion when it comes to taxation. Below are some guidelines that you should follow with regards to property taxation: