June 06, 2020

Your Guide to Real Estate Taxes

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Your Guide to Real Estate Taxes

Real estate means a real property like rental property, a home, or vacation home. Real estate is an investment that has the most tax strategies. The government tends to structure tax codes to incentivize certain behaviors, and private real estate ownership is one of those behaviors. 

The definition of real estate taxes is any tax that individuals have to pay on real estate or certain other forms of property. Real estate taxes are paid on almost all privately owned properties in the United States of America, with some exceptions. 

Real estate taxes are often referred to as property taxes. Although this is correct, personal property is also included. The difference between them is that personal property can be moved (without damage), so it includes vehicles, furniture, and livestock. Mobile homes are also considered personal property if they are situated on rented land; otherwise, it is considered real estate.

How Do Property Taxes Work?

Property taxes are probably the most annoying part of buying a house. The real problem is understanding them. Property taxes generally run from January 1st to December 31st every year, but they are set by the city in the early in the year and collected in the middle of the year on June 30th

The city assesses real estate taxes based on your property value. However, there is a lot of misunderstandings about the role of assessors and how they affect the taxes that homeowners pay. Assessors do not set taxes or chase tax dollars. The assessor is interested in fairly determining property values.

This value is then multiplied by the assessment rate and tax rate. The resulting number is the tax amount real property owners have to pay. Local governing bodies set their budgets for the coming year to cover services such as public schools and road maintenance. They set the tax rate to produce the dollars needed for their budgets.

Real Estate Tax Payments

There are three ways of paying property taxes:

  1. Under the mortgage that you arrange with the bank, the bank may collect a certain amount of monthly payment to apply on the property tax every year. Those consist of what is called Principal, Interest, Taxes (PIT).
  2. The second way you can make a payment towards real estate taxes is by paying the full tax amount based on the tax bill when it falls due on June 30th
  3. The third option you have for paying real estate taxes is to make payments under the Tax Installment Payment Program (TIPP) with the city. TIPP basically allows you to pay a monthly amount towards your property taxes in each and every month that you occupy the property.
Your Guide to Real Estate Taxes

How to Prepare for Taxes as Real Estate Agent

  1. Get all of your business income and expenses receipts. Auto expenses, dues, memberships, and subscriptions expenses, office expenses and advertising and promotions are the key expense categories. 
  2. Watch the mailbox for other documents that you are going to need to get your taxes prepared. These include 1095s, 1098s, 1099s, w-2s, and other annual tax documents filed with federal and state tax agencies.
  3. Determine which tax forms you need and when the associated tax deadline is if you won’t have your return ready by April 15th, file for a six months extension. 
  4. It’s important to make sure you actually file a return, even if you feel you can’t afford to pay the tax. Remember, not filing is a criminal offense and not paying is a civil offense.

Trump Tax Rules: Effect on Real Estate

  1. Mortgage interest deductions

In the prior years, mortgage interest deductions allowed to deduct up to 1 million dollars ($500K for single filers) of your mortgage interest. Now, you can only deduct up to $750K. Originally, the government planned to cut the mortgage interest deduction in half. 

  1. State and local tax

When you look at property taxes, there is now a cap up to $10,000 on property tax. Before tax reform, there was an unlimited write-off. For people who live in expensive areas, this can be a huge thing that impacts their housing affordability. 

  1. Capital gains tax

Homeowners can exempt a certain amount of money when they sell their primary residence, which is considered a place where you lived for two years of the most recent five years. Single filers can exempt up to $250K and for married couples, it is $500K. These numbers have not changed with the tax reform. 

  1. Estate tax

About 1% of homeowners would be impacted by the estate taxes if they were leaving property to their heirs. The exemptions for estate taxes are being doubled. For single filers, they can get an exemption up to 11.2 million dollars and for couples, they can get an exemption up to 22.4 million dollars of the estate tax exemption.

Your Guide to Real Estate Taxes

Real Estate Tax Deductions

There are many exemptions and real estate tax credits and deductions that individuals can take advantage of. Combat military personnel families, widows, and disable persons are examples of individuals who can benefit from exemptions. Here are tax deduction tips:

  • When you own a piece of property and want to sell that property and move up to a higher piece of property by going from the single-family residence to the duplex and going up to the commercial property, apartment units, etc., you can use the 1031 exchanges. They allow to sell one property and not pay tax as long as you are exchanging and going to another piece of property. 
  • You should also do cost segregation studies because they are the key to putting cash back in your pocket immediately. 
  • Another tip is to have real estate structures in the right entity to make sure you are getting great business write-offs, but not making that real estate taxable subject to Social Security and Medicare tax.
  • If you have a property for longer than 12 months, capital gains will usually tax you lower than regular income.
  • You should also be aware that when your real estate goes up and up, there is no tax on the appreciation. You could cash out, refinance, sell one property, and go to the next property and avoid taxes.
  • In real estate, there are options to pass it on after death completely tax-free for heirs, especially for estates that are under 10 million dollars. Although one won’t directly benefit from this, we all want the best for our future generations.
  • Other tax deductions that investors should consider include insurance, depreciation, travel expenses incurred when you are visiting your property, interest on financing, real property repairs, and casualty losses.
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Author: Charles Lutwidge

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