The term “tax savings” is typically used to describe real estate strategies that reduce your tax bill, but there are some strategies that can cost you money instead. Fortunately, these are usually very expensive or unnecessary additions that no one uses anymore.
Many people claim they know of ways to save money by buying or selling a home, investing in rental properties, or taking advantage of tax credits or deductions. While it is true that all of those things can help you pay less in taxes, what about paying more?
There are certain types of homes and rentals that may not be ideal for you or your investment strategy. For example, houses and apartments with lots of land close to transportation are often a better choice than ones farther away if you want to use the bus or train frequently.
This article will talk mostly about how owning a house can increase your taxable income. But before we get into those tips, let us review why having a house is such a good idea in the first place!
Why Having A House Is A Great Idea
To most people, living in a house comes as standard. It is only natural to live under the shelter of at least two roofs. However, this needn’t always be the case. There are many individuals out there who choose to live life without a roof over their head.
Some prefer staying in dorms or traveling while they are studying or work.
Property tax
When your property is sold, it is assessed based on its current market value. The assessor calculates how much you paid for the house in the past as well as what they believe the house will be worth in the future.
The former includes the cost to purchase the home while the latter looks at the land and the house itself. By law, you have seven days to appeal the assessment. If you do not, then you accept that price as fair market value for purposes of taxation.
By accepting this sale price, you are agreeing that the price was adequate enough to sell the house. In other words, you think the house is overpriced!
If you feel like you have been undervalued by too much, you can appeal the assessment. There are ways to lower the valuation of your home, but only if you prove the higher one isn’t accurate.
You must keep copies of all documents and proof of ownership during the assessment process, so make sure to note those things. Keep an eye out for potential irregularities as well.
Capital gains tax
When you sell an asset, like a house or car, your taxable capital gain is determined by how much you sold it for, and when you sold it.
The difference between the price of what you’re selling an asset for and what you paid to own it two years earlier is called a capital gain.
This can be due to a number of reasons, including changes in value (the market condition) or if you no longer want the item.
A small cost-effective way to reduce your taxes is through the use of residence losses.
These are dependent on whether you rent or own your home – if you rent then this is not applicable.
If you owned your home at the time of sale, you may be able to deduct certain expenses from your income.
The impact of the tax law on you
One of the biggest changes in the new tax laws is how they affect your estate. If someone dies within two years of you, their assets will be included in their estate. This includes all property, including homes!
If their heirs don’t sell this home, it could remain sitting idle for months or even years after the death. During that time, taxes can pile up and cost taxpayers more money.
In addition to paying inheritance tax, any increase in value of the house due to things like remodels or renovations means higher income capital gains, which also add to costs.
So what happens to these increased costs? Some goes back into the coffers of the government, but most are passed onto the next owner. And since many wealthy people own a large number of properties, this can have a significant financial effect on them.
Tax experts say it’s best to wait two years before passing away to see how the new rules apply to you and your estate.
How to reduce your tax bill
The easiest way to save money on taxes is by and large reducing your income! As mentioned earlier, one of the main ways to do this is through the reduction of monthly rents or moving in with family members.
Not only does this help you stay within your budget, but it also helps lower your tax bill per year. After all, less income = smaller taxable bracket. And staying in a home owned by someone else can even qualify as tax savings in some cases!
There are many other ways to reduce your annual tax bill that don’t require any kind of major lifestyle change. By being aware of these strategies, you will know what to do to maximize your savings.
And while most people focus on their own taxes, there is an additional cost incurred when someone else’s taxes come due as well.
Stay out of debt
One of the biggest sources of tax savings in any given year is your mortgage. Many people make the mistake of paying too much for a house or buying a lot of items that they desire, which later become investments.
They spend more money than their budget allows to keep up with the demands of their spending habits, leading to higher interest payments and longer term debts. All of this adds up to bigger taxes down the road.
If you are in debt due to home purchases or other reasons, consider taking time to pay off those loans before adding new ones. This will help you save tax dollars in the long run.
Another way to reduce tax bills is by donating property or the value of your residence to charity. If you’re selling a home, you can often deduct the cost of sale from your income taxes!
By doing these things, you will also feel some relief as you get rid of all of your debt. Read about ways to manage your finances online to learn more.
Stay consistent
The first way to reduce your taxes is to stay consistent with how you manage your real estate. This includes keeping track of what properties you sell, when you buy new ones, and whether or not you rent out yours.
All three of these things can have different tax implications. For example, if you are in the business of selling houses, then you might need to keep records for longer than someone who sells mobile homes.
But staying within budget is an excellent way to avoid having to pay more money in taxes. If you are aware of your income levels, you can look for ways to lower them through investment strategies.
And remember, taxes will always increase as your income does! It’s important to be able to anticipate that and plan for it.
Know your tax bracket
The first thing you need to do is determine what kind of income belongs in which tax bracket. This changes depending on how much money you make, where you live, and whether or not you have children.
If you are in the highest tax bracket (more than $100k per year), then it makes sense to consider more expensive homes as better investments because you will save more taxes this way.
On the other hand, if you are in the lowest tax bracket ($50k-$75k per year), then buying a cheaper home can be a smarter move since you’ll still pay less in property taxes each year!
The best way to know which category you fall into is by looking at past tax returns and figuring out what kind of income you earn annually.
Stay current with tax laws
It’s important to stay up-to-date on all of the various taxes that apply to your real estate investments.
There are many different types of income taxation, capital gains taxation and wealth tax that depend upon what kind of asset you own and when you sold it.
For example, if you sell an investment property soon after buying it, you may qualify for ordinary (non-capital) gain which is taxed at lower rates than the higher long term capital gain rate.
The timing and amount of any capital gains can have significant tax consequences depending on how much money you make.
