The term “real estate tax” can mean many things to different people. Some may only know what property taxes are, which is actually quite important. Others might not understand personal property or source of income-based taxation, which both play an integral part in real estate taxes as well.
This article will go into detail about all three types of real estate taxes and how they work. It will also discuss some easy ways to reduce your real estate tax burden when selling your home or buying a new one.
Income tax
The other major source of revenue for your local government is income taxes. Most people agree that as wealthy individuals and corporations get richer, our governments need more money to fund their services like education, police and fire protection, and taking care of our streets and highways.
However, some argue that we have become too dependent on this source of revenue because it is increasingly difficult to be rich. Technology has made it possible to do business easily anywhere in the world, so companies can choose to keep their profits where they are able to enjoy them instead of bringing theirs back home. This keeps the amount of wealth being spread around the country at a constant level.
Another problem with relying heavily on income tax is that many high-income earners live outside of of of the countries that offer low or no personal income tax.
Sales tax
When you buy or sell a home, there is usually an additional fee that is called sales tax. This tax is dependent on your state and depends on what type of property you are buying or selling.
Most states have to collect this tax themselves, so it can be tricky to know where yours comes from. Some sources say that it is paid by the seller, while others say it is paid by the buyer. It really does not matter who pays the tax as both parties add it onto their purchase price and then pass the cost along to you.
The way I like to think about it is that the sellers’s house is being sold to you, the new owner, and thus they are paying the sale tax for themselves! They are taking advantage of all of the features of the house because they get to keep them after it is bought. Therefore, they will probably spend more money improving and enhancing the house than if it was brand new.
This seems rather backwards, but it makes sense when you look at it. The person doing the investing in the house gets a discount due to the fact that they will pay later, therefore saving them money now.
Property transfer tax
A property transfer tax is an additional fee that sellers are charged when they sell their home to another owner. This can easily add up, especially if you’re in a high-demand area or your house is very expensive!
The tax is usually paid once every year per $1 million of sales price, with a maximum of $500. The buyer’s broker typically pays this tax for his/her seller.
This article will go into more detail about what this tax covers, how it’s calculated, and where the money goes.
Local tax
The other major type of real estate taxes are local property taxes, or what is commonly referred to as your city/municipality income tax. This includes any kind of sales tax you pay at the state level and then onto your municipality for how much income they calculate you have from owning a house.
Most famously known is California’s “Super-Rich Tax” where those with an annual income over $250k must pay 8% income tax (double the standard rate). What many people don’t know about this tax though, is that it also adds in a municipal income tax which can easily add up to more than double the super rich tax!
This additional municipal income tax will vary by community but usually comes out around 3%-6%. This means if your income was just barely under the threshold, you can be paying MORE IN TAXES every month compared to someone who is just barely above it!
That extra money could very well go towards public services like schools, hospitals, or police departments.
Mortgage interest
The mortgage interest that your lender is paying you is typically tax-deductible, but only if it meets certain requirements. To be deductible, this cost must be related to your principal residence or your main place of business.
The IRS defines a primary residence as any dwelling in which you maintain sleeping quarters as well as an office where you perform duties for your job. A secondary residence does not meet the requirement so it cannot be included in the deduction.
Land with buildings on it will always qualify as a primary residence even though you may not use it at times. This includes vacant land!
If you are renting an apartment from someone else, then the unit you live in no longer qualifies as your primary residence unless you move into it alone. You have to satisfy the residency requirement every day independently of whether you pay rent or not.
Because most people can’t afford to buy a house outright, they take out a loan to do so. This means that they need to find a home that their income can cover monthly while also including a large tax savings in deductibles.
However, before you apply for the loan, make sure to check how much interest you would actually be able to deduct because it could very easily exceed the tax savings from the house payment itself.
Home insurance
Like most people, you will want to make sure that your house is protected in case of theft or damage. This coverage is very important as it can keep expensive repairs or a new house within budget.
Most homeowners are familiar with home insurance, but some may not know what kind of policy they have or how much coverage they have. It’s easy to overlook this detail, but making an effort to be aware of yours can save you money in the long run.
You pay more for house insurance when you go without coverage than when you do. In fact, according to InsuranceQuotes.com, average monthly homeowner costs increase by about $100 per month if you don’t have adequate coverage.
That means missing out on one year of protection costs around $1,200! If someone breaks into your property, this amount could easily add up to many thousands of dollars in medical bills and lost income.
So how are real estate taxes paid?
We asked several experts to tell us how they paid their annual property tax bill and what tricks they used to reduce payment day-to-day. The answers may surprise you.
“I never actually see my yearly tax bill,” said Daniel Miller, senior finance manager at Coldwell Banker Bain in Irvine, California. “It gets calculated online and mailed to me.”
He added that he doesn’t actively look for his tax information until December, when he makes payments using his bank account.
