real estate investor celebrating freedom on hike overlooking canyon


Blocks stacked one on top of another saying, "Lower Your Taxes"

Taxes will come up again and again as you grow as a real estate investor and learn more about how to invest in real estate.

Keep in mind that "real estate taxes" refer to a variety of various taxes that fall under the broad category of being "real estate related" throughout this text. We'll go through some of the most common types of real estate taxes, how to avoid them, but it’s important to keep in mind that “real estate taxes” are simply a class of taxes that fall within the realm of property ownership.

Real Estate Tax Example #1: Capital Gains Tax

Desk with a post-it note that says, "Capital Gains Tax", one of the most common forms of real estate taxes

The federal government and/or state governments levy a capital gains tax on the profit generated by selling an asset, such as real estate, when it’s sold for more than it was purchased for. The tax is based on the difference between what the asset sold for and what it originally cost, plus any improvements made to the item.

Capital gains taxes can have a significant impact on the overall return on a real estate investment and should be an integral consideration when making investment decisions. The good news? There are several strategies for real estate investors to lower their capital gains tax liability. 

They can, for example, maintain a property for a longer period of time to benefit from reduced long-term capital gains tax rates, or they can use tax-deferred exchanges to postpone paying capital gains tax.

Real Estate Tax Example #2: Property Tax

Puzzle pieces that spell out, "Property Tax", a common real estate tax

Property taxes are a tax paid by property owners to the local government depending on the value of their property. These taxes are typically used to fund things like schools, roads, and public safety. 

Two Key Things To Remember About Property Taxes

1. Property values are determined by local property assessors

2.  There are ways to lower property taxes that include;

  • Apply for an exemption or deduction
  • Challenge the property’s value assessment made by the local assessor
  • Invest in energy-efficient upgrades
  • File a tax appeal

How Are Property Taxes Calculated?

Property taxes are computed by multiplying the entire assessed value of the property by the local tax rate.

Real Estate Tax Example #3: Transfer Tax

Real estate investor holding miniature house and keys - representing the transfer tax that accompanies the sale of properties

A real estate transfer tax, also known as a conveyance tax or transfer fee, is a tax levied by municipal or state governments when ownership of real estate property changes hands. The tax is based on the greater of the property's sale price or assessed value.

The amount of the tax varies based on where the property is located and the type of property sold. The buyer usually pays the real estate transfer tax, but in rare situations, the seller may be required to pay a portion of the tax as well. Real estate transfer taxes can have a significant impact on the entire cost of a real estate transaction and should be considered by both buyers and sellers when negotiating a deal.

It's also critical for real estate investors to understand the transfer tax rules and regulations in their area so they can ensure they're following the rules and maximizing their investment returns.

Tax Break: Depreciation Deduction

Image of currency with a calculator and a pin with the word, "depreciation"

A light at the end of the tunnel! Even though we're talking about different types of real estate taxes, we wanted to touch on one form of tax breaks that real estate investors can take advantage of: Depreciation. The depreciation deduction is intended to account for the property's wear and tear as well as the possibility that it will become obsolete over time.

This deduction can assist real estate investors in saving a significant amount of money on taxes by lowering their taxable income and, as a result, their overall tax burden. The type of property and the tax legislation in the area in which the property is located might have an impact on how much depreciation can be deducted and how long it can be taken over.

The Importance Of Consulting An Expert

Real estate investing is an incredibly rewarding career path, but taxes are one of the most dangerous places that things can go wrong for investors. Accordingly, before making any large investments, real estate investors should consult with a tax lawyer. A tax lawyer can advise you on tax laws, rules, and tactics that may effect your investment and assist you understand how your activities may affect your taxes.

The lawyer can also assist you in devising a tax-efficient investment strategy, providing tax planning guidance, and assisting you in determining how to cope with complex tax regulations such as depreciation and cost-recovery methods.


The Takeaway:

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