Taxes are quite confusing and challenging, and real estate taxes are not an exception. Especially if you have little or no knowledge about how these and related taxes work. The knowledge of tax rates, due dates, property values, price hikes, and proper computation is very key. This knowledge keeps you safe from manipulation and helps you take advantage of significant opportunities available. Below is a list of 10 real estate tax hacks and facts that you should know. Please read on.
- The 1031 Exchange
This is one of the surest tricks about real estate investment but is hardly known by most investors. Most investors have used this loophole to reap big breaks on the assets that have significantly appreciated. It allows you, as an investor, to defer your tax bill provided you’ll use the money to reinvest in another property of equal or higher value as a replacement. You can as well defer your capital gains taxes should you decide to sell your property. You’ll have to identify a replacement property within 45 days and thereafter have 135 days to close. This can be a very challenging and tiresome process especially when you’re not certain about the property and its closure. You can visit some of the reputable real estate broker organizations such as the Turner Investment Corporation to learn more about this exchange.
- Utilize the Special Low Tax Rates
Every taxpayer has been thinking about the tax reform whose filing is different from the old tax laws. It also resulted in low ordinary income tax rates for most taxpayers across the states. Therefore, depending on the portfolio of your investment, you might get a tax-free treatment which is an advantage to your business. Ensure to take advantage of such low tax rates.
- Not All States Have Sales Taxes
Sales taxes don’t exist in the federal government. However, most states have this tax. Currently, New Hampshire, Montana, Delaware, Oregon, and Alaska are the only states that haven’t imposed a statewide sales tax. The other states that have the tax also have varying policies towards what’s taxed and what’s not. There are several purchase types subject to sales tax that can be confusing and surprising to learn when buying a house. You need to be aware of how such taxes are operated at in your state to avoid being manipulated especially if you’re buying your house from a real estate broker. They might trick you to pay for the sales tax yet your county or state doesn’t apply the sales tax on such purchases.
- Reinvested Dividends
This is not a tax deduction but the subtraction keeps your real estate business from paying more taxes on your mutual funds. Therefore, if you invest your dividends on mutual funds in extra shares, you’ll be able to achieve an increased tax basis in each of your investment fund. This leads to a reduction in the amount of taxable capital gain later on when you’ll decide to sell your shares. You should, therefore, include the reinvested dividends on your business’ cost basis to allow you to make a subtraction from the sale proceeds of these funds in order to determine if you made profits or losses.
- Real Estate Transfer Taxes
In some states and counties, taxes are levied – often termed as “stamp” or documentary taxes – when the mortgage is recorded or when any real property changes hands. In these states, the taxes are calculated based on the percentage of the price of the property purchased. Different states have different policies governing their real property. The local real property transfer taxes and state can impact your ultimate cost of purchasing a house. You need to research how these taxes are levied in your state and county to avoid being tricked or failing to fulfill some of the necessary tax responsibilities. In some states, you’ll be required to pay transfer taxes both to the town and to the state. However, there are states that have real estate transfer taxes but don’t have sales taxes, such as the Delaware state.
- Points on Mortgages
Probably you’ve heard that if you took out a loan in the years before 2017, you could deduct interest on mortgages of up to $1 million and if you take the loan in 2018 or later, you’ll deduct the interest of up to $750,000. But did you know that you can also deduct the points that you pay upfront as you make plans to buy a house by taking a mortgage? However, if you have points on the refinanced mortgage, you’ll need to spread out them across the loan term.
- Itemize or Take the Standard Deduction?
Mortgage-interest payments alongside local property taxes and other expenses have accumulated to become more than the standard deductions specified by the IRS. Therefore, if the standard deductions are lower than your itemized deductions, you should hunt down all the legit items. Perhaps you’ll need to lower down the tax bill. But if the itemized deductions will be less, you’ll need to stick to the standard deductions.
- Split Your Business in 2+
If you’re running a real estate investment company, this move can be advantageous for your company. It has provisions that tend to tax specific pass-through income for some organizations like yours and those that provide professional services. Splitting your company into two or more sister companies allows these companies to qualify for low pass-through rates while the main company pays high taxes. If you’re operating a law firm, you can divide the organization to a real estate organization and other companies to enjoy the amazing pass-through rates.
- Turn Your Business into a Pass-Through Business
Pass-throughs have become common in the US. These businesses have an advantage under the tax bill, unlike if they’d remained as an individual. The profits of these companies are taxed twice – on their income and on the dividends that the shareholders receive. However, the earnings are significantly passed through to the business owners and taxes imposed depending on the owners’ tax brackets.
- Turn Your Business into a Corporation
If your real estate business is giving you a good deal of money that you’ve no plans on spending it in the near future, you can turn your business into a corporation (also called a C-corp) rather than a pass-through. This way, you’ll be liable for paying the 21% corporate tax on your income which is a big reduction from what you’d pay as an individual regardless of getting pass-through discounts. With a C-corp also, you’ll get to deduct all local and state taxes which you wouldn’t as a pass-through. Should you leave the corporate earnings to your heirs, they’ll not pay the taxes when they cash out.
These are some of the real estate hacks and facts. Ensure to get a head-start on the tax reform to avoid being manipulated or missing out on some state and county tax obligation. You’ll also be in a better position to enjoy some of the benefits as an investor. Also, look out for other relevant themed blogs to learn more about different real estate taxes in your state and county.