Whether you inherit or buy property, you will deal with some form of taxes. You are better off if you understand taxes before buying or selling real estate. If you work with a real estate transaction attorney, you won't overpay or underpay and incur penalties. Below are three tax categories related to real estate.
1. Rental Income Tax
If you rent out a property, the amount you receive from your tenants is subject to tax. Based on your level of involvement, the tax may be capital gains or normal income. In addition, your rental income includes lease cancellation payments, advance payments, security deposits, etc.
You can minimize the rental income tax you pay with guidance from your real estate attorney. For example, you could take advantage of valuable deductions when you prepare taxes for investment property. Such deductions include repairs, expenses, depreciation, and fees to service providers.
2. Capital Gains Tax
You incur capital gains tax when you sell a house at a profit. For instance, if you buy a house at $400,000 and later sell the house at $450,000, the capital gain is $50,000. A real estate attorney helps you calculate the exact capital gains based on various factors. Such factors include how long you held the asset, current tax rates, and expenses that apply to your profit.
Most of the time, capital gains are associated with commercial properties and secondary residences. However, your real estate law firm and an intermediary can help you defer the tax you pay with a 1031 exchange. But, if the profit on your primary residence is big, you won't qualify for a 1031 exchange.
3. Property Taxes
You are probably familiar with real estate taxes if you are a homeowner. You pay property taxes to your local government for projects that benefit the community. For example, libraries, roads, and schools. Property taxes depend on the assessed value of your land and premises built on the land. You pay the taxes to your local tax assessor annually or as part of your monthly mortgage.
The taxes don't end when you pay off your mortgage or no longer use your house as a primary home. You are on the hook for property tax for as long as the property is registered in your name. Your bill goes up and down when your local authority adjusts the tax rates or when your property gets reassessed.
Real estate taxes are complex and change periodically. Thus, even if you work with a real estate agent, you still need the services of a real estate law firm. Hire a real estate tax attorney to handle real estate taxes effectively. As a result, you won't miss out on taxes or pay more than needed.
Contact a law firm like Mack Rice Law to learn more.