Real Estate Investing Guide The Difference Between Income Tax And Property Tax
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Real Estate Investing Guide: Understanding Income Tax vs. Property Tax
Summary
Understanding the types of taxes associated with real estate investing is crucial. Two primary taxes you'll encounter are income tax and property tax. This guide will help you differentiate between the two, explain when they're applicable, and clarify their role in real estate investing.
Income Tax
Income tax is levied on the earnings of individuals, corporations, and other legal entities. This tax can be proportional, progressive, or regressive. For corporations, it’s often termed corporate income tax, while for individuals, it’s deducted from their total income.
In real estate, income tax applies when you earn money from your property. For instance, if you lease a piece of land, you must pay income tax on the rental income received. This income includes all amounts received as rent, which is any payment for the use or occupation of your property.
A beneficial aspect of income tax in real estate is the ability to deduct various rental expenses. These can include:
- Advertising
- Cleaning and maintenance
- Utilities
- Insurance
- Taxes and interest
- Commissions
- Tax preparation fees
- Travel and local transportation expenses
If you're a cash basis taxpayer, report your rental income the year you receive it, regardless of when it was earned.
Property Tax
Property tax, also known as millage tax, is an ad-valorem tax based on the value of the property. It applies to three types of property: land, improvements (e.g., buildings), and personal property like movable objects.
In real estate investing, property tax is assessed through a property appraisal. The tax is then calculated in proportion to the property's value. It's essential to understand the specific property tax regulations in your investment area.
Avoid the common mistake of confusing property tax with special assessments. While property tax is based on the property's market value, special assessments rely on a specific enhancement or benefit.
To calculate property tax, multiply your property's assessed value by the mill rate, then divide by one thousand.
Understanding these tax obligations is essential for successful real estate investing. Knowing when and how each tax applies will help you navigate the complexities of the industry effectively.
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