Types of Taxes Related to Real Estate
Purchasing real estate comes with a number of taxes that homeowners, buyers, and sellers must be aware of. Buying your first home, investing in rental homes, or selling land requires you to be familiar with the tax landscape to plan ahead and avoid unexpected fees. Below is a concise overview of the most crucial types of taxes related to real estate:
1. Property Taxes
Property tax is an ongoing yearly payment required by local government, typically depending on the appraisal value of property. Property tax pays for a range of essentials such as school, roads, and emergency departments. Property taxes can differ sharply depending on how and where it is located.
Who Pays: Owners of property.
Key Issues: Make sure you know what determines the value of your property and if there are any exemptions or reductions for which you qualify, like senior or veterans' reductions.
2. Capital Gains Tax
Capital gains tax is applied when you sell a property and make a profit. The amount to be paid in taxes is the difference between the property's purchase price (plus improvements) and the sale price received.
Who Pays: Profit-generating sellers.
Exemptions: In general, primary residences are exempt to an extent, provided you qualify under residency regulations. Investment properties are typically taxed in their entirety.
Long-term vs. Short-term Gains: Real estate owned for over one year may qualify for lower long-term capital gains tax rates compared to short-term rates for properties sold within one year of purchase.
3. Transfer Tax
Also referred to as a deed tax, stamp duty, or conveyance tax, this is a one-time tax levied during the change of property ownership.
Who Pays: Typically the buyer, seller, or both, depending on the jurisdiction.
Rates: Rates differ by jurisdiction and can be a percentage of the sale price.
4. Income Tax on Rental Properties
If you own rental property, the income you earn is taxable as income. But you can typically match it with deductions for the expense of managing the property, including maintenance, property management fees, and mortgage interest.
Who Pays: Homeowners with rental income.
Deductions: Keep thorough records of all expenses to get maximum tax deductions.
5. Inheritance/Estate Tax
If real property is inherited, the estate may be taxable on inheritance or estate taxes on its value and according to the laws in their local jurisdiction.
Who Pays: The estate or heirs.
Exemptions: There are exemptions or reduced rates for properties that are less than a certain value in most jurisdictions.
6. Mortgage Recording Tax
Some jurisdictions impose a tax upon the placing of a mortgage on a property purchase.
Who Pays: Buyers of the mortgage.
Considerations: Typically a onetime payment and made at the time of closing.
7. Foreign Investment Taxes
You may be taxed extra or subject to withholding if you are a foreign buyer purchasing property.
Who Pays: Foreign buyers and sellers of property.
Example: The U.S. FIRPTA (Foreign Investment in Real Property Tax Act) taxes withholding tax upon a foreign national sale of American realty.
8. Special Assessments
Special levies are temporary taxes charged by local governments to finance particular infrastructure improvements, e.g., new roads or sewers.
Who Pays: Property owners in the affected area.
Duration: Usually one-time or temporary payment.
Taxes are the very essence of owning and buying property. While they may look confusing, knowledge about these taxes will enable you to make sensible decisions and get a surprise or two less often. Always see a tax adviser or real estate agent to advise on the nuances of taxes relevant in your local market. Whatever your activity be, whether purchase, sale, or investment, you will remain well-equipped with information to guide your realty portfolio.
