We all know that real estate is quite profitable and it is a good investment as the results are always a win-win. Your home, property, building, apartment, shop, etc., will always give you rent or additional money once you sell it. However, real estate also comes with a responsibility of tax implications.

In this comprehensive and useful guide, we will take you through the complex world of tax implications in the simplest way possible. With this guide, you can get your many queries solved regarding the complications of “tax”.

Property Tax

As you might be familiar with, property tax is one of the most common tax implications while owning a real estate.

These taxes are usually levied by the government, which assures that you give a property tax according to the value of your property.

This property tax revenue helps the government with public schools, infrastructure, and public safety. It should be paid off as a duty by real estate owners.

Income Tax

If you have rented out a property and get monthly rent, then you need to file this income in your tax returns.

However, this tax applies to both commercial and residential properties. So, rental income is considered taxable income; therefore, maintaining a rental record and a tax record is a must in this case.

Also, if you want to reduce your income tax, you need to deduct property-related expenses. This means that you can deduct the income tax by including the mortgage interest, property management fee, property insurance, repair costs, and utilities being paid by the landlord.

Moreover, you also need to observe the depreciation factor and keep that in mind as a real estate investor. This means that the IRS allows you to depreciate the value of your property after using it for 27.5 years for residential properties and 39 years for commercial properties.

Hence, depreciation can save you income tax and can provide significant tax benefits, which helps to offset your rental income.

Capital Gains Tax

Now, let’s understand capital gains taxes, which is not a common tax implication that everyone is aware of. Whenever one of you may sell a property that gives a greater value than it was bought is applicable to capital gains tax.

Capital gains taxes are classified into two types: one is short-term, and the other is long-term.

Short Term Capital Gains

Short-term capital gains are applicable on a property that you have held for a short period of one year or less.

It is taxed on your ordinary income and can be higher than the long-term capital gains rate.

Long-Term Capital Gains

If you have acquired a property for more than a year, your property tends to give long-term gains and is applicable to the long-term capital gains tax.

However, in long-term tax gain, you can get preferential rates, which are way lower than the ordinary income rates.

Therefore, you can consider that the exact capital gain depends on your income and also depends on the tax laws within your jurisdiction. However, some homeowners also qualify for exemptions according to the law.

Depreciation

As discussed in the comprehensive guide above, if you want to reduce your income tax, you need to deduct property-related expenses by devaluing the cost of your property.

Depreciation can be calculated using a formula, and is applicable to houses with a lifetime above 27.5 years.

Also, depreciation is applicable on commercial properties when used above 39 years.

In addition, to calculate depreciation, you should have complete documents and dates on which you purchased the property.

Real Estate Tax Deductions

Real estate gives numerous tax deductions and credits, which eventually reduces the tax liability.

These deductions include mortgage interest deductions, property tax deductions, energy efficient improvements, home office deductions, and home equity loan interest deductions.

Mortgage interest deductions work to deduct the interest paid on their mortgage loans. Furthermore, the property tax paid on your primary residence is also deducted.

Now, if you need some more deductions, any energy-efficient improvement in your home, like adding solar or energy-efficient windows, will help you qualify for federal tax credits.

Another real estate tax deduction is applicable if you use your house as an office or for business purposes. You can easily achieve the tax deduction without any hassle.

Lastly, the interest paid on home equity loans are also deductible. 

State & Local Taxes

How can we not include state and local taxes in this guide? These taxes are applicable to real estate owners. Along with the federal tax, the state and local taxes also impact your tax liabilities. Therefore, you need to understand these taxes as they vary according to the jurisdiction.

Estate Tax

Estate taxes are applicable when one passes away. So, the value/price of your real estate holdings is included in your taxable estate.

Again, the rules and exemptions in this tax vary as per the jurisdiction. You can always check tax laws in the country you live on a government website.

Also, be cautious to understand each tax implication and how it works for your property ie; residential or commercial to ensure you are never paying taxes that do not apply to you!

Consult a Professional Help

This was a comprehensive guide to understanding the tax implications of owning real estate. However, you can also consult a tax professional to help you ensure that you fulfill the complex tax implications on time to avoid any surcharges. Taxes are never a burden if you are aware of them. You can always get tax deductions in one case or the other.

Conclusion

In the end, the guide is available to all, but some tax implications also change according to different jurisdictions, which you need to consider before owning a real estate property. We would suggest going through each tax one by one and figuring out which tax implication is applicable to your property or not. Then, you are good to fulfill your liability and duty towards your homeland. Good luck to all the taxpayers out there!