The very first thing you should know about real estate tax is that it is not like other taxes. There are two main reasons for this. First, real estate has no defined source of income so there is never really an occasion to calculate how much revenue it creates. Second, property owners usually spend money to maintain their homes, therefore they account for those costs when calculating their yearly tax bill.
The second reason why real estate taxation differs from others is because it only applies to homeowners. Businesses are taxed based on their annual gross revenues which include profits as well as spending, but homeowners do not have such opportunities. If they want to reduce or even eliminate their taxable income, they must keep up with maintenance and renovation projects.
To give you some context, most countries in the world use a system of progressive taxation. This means that as your income increases, you pay more in taxes. In America, our federal government uses a flat rate tax structure where all individuals earn the same amount per year receive the same level of tax relief. However, state and local governments often apply different levels of taxation depending on who lives within their borders!
What is progressive taxation?
A progressive tax system means that higher income earners pay a greater proportion of their income in taxes than lower income earners.
House value
The most important factor when it comes to real estate tax is determining your house’s market value.
Your market value is what someone actually paid for your home, or what you could get for it today. Many tools and resources can be used to determine this price.
House size
The larger your house, the higher your tax bill! This is one of the trickiest ways to be taxed in real estate. If you are lucky enough to move into a home with an attached garage, a common feature these days, then congratulations! You just saved money in taxes!
If your house has an attached garage, you can sell this space separately from your home as long as you include it when calculating net taxable income.
However, most people don’t have this luxury. Most homes today do not come with a separate garage- they’re built right into the house!
This makes calculating capital gains more difficult than if there was a detached garage. Since part of your home is used for storage, you cannot simply take the cost of the land, add the price of the house, and subtract the costs of the garage- those costs must also be included in the calculation.
Cost of living
The other major factor in how much your property taxes rise is what you call the “cost of living” deduction. This deducts an amount from your tax bill that depends on where you live and what kind of community you are in.
The cost of living varies greatly depending on which area of the country you live in and what kind of amenities there are nearby. These include things like good schools, social opportunities, and hospitals close by.
Some towns have organized groups that help out each other with fundraisers or events to promote community spirit. Others may have organizations that offer low income discounts at restaurants and stores.
There are many different ways to save money through the local economy. Finding out who offers these and being conscious about donating or spending money to support them can reduce your taxable income very slightly.
Capital gains
The difference between your home’s sale price and what you paid for it is called capital gain. This occurs when your house sells for more than you bought it from someone else or you sold yours to buy another one.
The tax law allows anyone to write off their income-tax bill by including some of these costs in an exception called “capital gain.” People using this exclusion must be able to prove that they made the down payment from their own money, and not somebody else’s, and that they lived in the property as their primary residence.
Real estate agents help people use the capital gain exemption by making sure everything about a house–price, closing date, etc.–is documented properly. Agents also make sure buyers are eligible for the exemption by confirming that the rules have been met.
Experts agree that buying and selling a home is a great way to invest in real estate. Because of the capital gain exclusion, even expensive homes can be affordable if you will pay less than half of the cost in taxes due to the investment nature of owning a house.
Cost of sale
The term “cost of sale” is typically defined as the fees and expenses related to selling your home, such as listing costs, appraisal fees, legal fees, and more. Some of these fees are required by law or contract when you sell your house, while others are industry norms that most sellers include in their advertising budget.
The cost of sale can vary significantly depending upon what kind of seller you are and how well-known you are within the real estate community. More popular sellers may have many people paying to list their homes, take pictures for listings, go to showing appointments with them, and so on.
While this can be very helpful for their sales, it also means there will be additional money in their wallet coming from all of those parties. For less popular sellers who do not have as much exposure, they may not get the same benefits!
There are some other factors that can influence the cost of sale as well. If you choose to hire an agent to represent you during the transaction, his or her commission will be included in the overall cost of sale.
And unfortunately, like any area of life, higher costs often mean bigger profits later.
Property tax
The other major type of taxation in the US is property tax. This is how your state and local governments get most of their money to spend! Most states have an annual budget that includes taxes on income, sales, and property.
Property tax comes at a very high cost for homeowners. It can easily add up quickly as you grow as a real estate investor. Fortunately, there are ways to reduce this expense by investing properly.
You will not want to forget about this important tax when it comes time to invest or sell a home. Plus, knowing how to avoid paying too much tax can help with investment strategies and financing.
Here’s what you need to know about how property tax is calculated in the US.
