Real estate investing is a great way to grow your wealth and create passive income. The downside? Taxes. The IRS has two different tax structures for real estate investors: one for people who invest in the rental property and one for those who support a business they actively run themselves (such as flipping houses).
It is essential to understand what you are responsible for when it comes to real estate taxes. By knowing the different types of taxes and what they entail, you can make better decisions about your investments. This article will outline what you need to know about real estate taxes in the United States.
Types of Taxes You Must Know About
When you invest in real estate, there are a few taxes that you need to be aware of. The four main types of taxes to be aware of include federal income tax, state income tax, capital gains tax, and property tax.
Federal Income Tax:
The federal government imposes income tax on all citizens and residents of the United States. This tax is based on your taxable income, which is your gross income minus any deductions or exemptions that you may qualify for. This real estate tax can be pretty significant for real estate investors, especially if you earn a high income. However, there are many ways to reduce your federal income tax liability, so it is essential to consult with a tax professional to find the best strategy for you.
State Income Tax:
Like the federal government, each state imposes its income tax on its citizens and residents. The amount of state income tax that you owe will depend on your taxable income and your state’s tax rates. Again, it is essential to consult with a tax professional to find the best way to reduce your state income tax liability.
Capital Gains Tax:
When you sell a property, you have invested in; you may be liable for capital gains tax. This tax is based on the difference between the sale price of the property and your original purchase price, plus any costs associated with the sale. Capital gains tax can be pretty costly, so planning and factor it into your investment decisions is essential.
Property Tax:
The property tax is a tax that you pay on the value of the property you own. This tax is paid to the local government and can vary depending on the location. This real estate tax is calculated on the assessed value of the property.
The Bottom Line
As you can see, there are many different types of taxes involved with real estate investing. It is essential to be aware of these taxes so that they don’t catch you by surprise and cause you to lose money on a deal. Understanding real estate taxes is just one piece of real estate investing. That is why we offer affordable real estate education courses to prepare investors with the knowledge they need every step of the way. These courses were designed for all levels and learning styles. We know firsthand the freedom and possibilities real estate investing offers, and we want to share what we know.
Contact us today to learn more about real estate investing and the taxes involved. We would be happy to help! Wishing you success in all you do!