Real estate transactions usually involve frustrating hidden costs and fees. The biggest of these are tax-related. Therefore, clients appreciate real estate agents who can help with information like what taxes to expect, how to reduce tax loads, and tax accountant recommendations.
You don’t have to be a guru in this regard. Just know enough to help your clients navigate the murky waters of real estate taxes or point them in the right direction.
That’s why you should keep reading. Whether the client is a homeowner, real estate investor, seller, or buyer, here are the real estate taxes they will encounter and the deductions they can use to reduce the tax load.
Property Tax
This real estate tax is determined by multiplying the property’s value by the local tax rate. However, property type also matters. That’s why rental properties often have higher property taxes than personal homes.
When assessing rental and commercial properties, the authorities sometimes include the value of non-real estate properties such as furniture, automobiles, and machinery. This is not the case for personal properties.
If your client is the seller, they are liable for the property tax until the sale is closed. If your client is the buyer, they take up the responsibility after closing the sale. The authorities issue a property tax bill every year, with the proceeds going towards developing the community.
Here are some options for reducing property tax.
Property Reassessment
Encourage your clients to challenge the authority’s assessment and hire their own assessor. More often than not, they will discover their property is over-assessed. The chances of these happening are actually as high as 30% to 60%.
Therefore, if your client reassesses their home, they may discover that their property’s value is actually lower. Thus, the property tax should also be lower.
Homestead Tax Exemptions and Similar Programs
There are tax exemptions for properties (like homesteads and agricultural lands), and people like veterans, seniors, and people with disabilities. Your clients may qualify for such exemptions and deductions.
Early Payment
Authorities sometimes offer discounts and deductions to people who pay their taxes early. Even if this is not the case, early payment will protect your clients from the penalties of late payments and tax evasion.
For clients with mortgage plans, the bank may already include property tax in their mortgage payments. For everyone else, it’s up to them to keep updated on their taxes. For most states, the tax bill will come in around October.
Depreciation
Clients like real estate investors or REITs (Real Estate Investment Trusts) qualify for this. As a matter of fact, most rental and commercial properties do. However, there are conditions, and depreciation recapture applies when the clients sell those properties.
Capital Gains Tax
This real estate tax only applies to the profit made from selling a property. Therefore, only sellers have to pay it and only when they profit from the sale. To determine this, you (or the client) need to subtract the property’s buying price and other expenses (like inspection and appraisal fees, mortgage, and improvement projects) from its selling price.
When there is profit, your client, the seller, has to pay capital gains tax. When there is a loss, the client doesn’t have to pay capital gains tax. They can actually deduct the loss from their regular income tax bills.
Rates for capital gains tax depend on how long the client owned the property before selling it. Ownership of less than one year is tagged as short-term capital gains. The tax rate is higher. Ownership above one year is classified as long-term capital gains, attracting a lower tax rate.
Here are some ways your clients can reduce their capital gains tax load.
Holding On to the Property for More Than a Year
This allows the sale to qualify as long-term capital gains. Therefore, the tax rate will be lower. The deduction is even more impressive if the client is a homeowner who lives on the property. However, commercial and rental properties generally enjoy higher real estate tax breaks.
Mortgage Interest and Home Equity Loan Deduction
Both homeowners and real estate investors can deduct mortgage interest from their capital gains tax. However, there are conditions. For example, homeowners can only do this up to $750,000. Likewise, home equity loans are only deductible if used to improve the property.
Bequeathing Property as Inheritance
The federal government does not tax inherited real estate. However, the property’s transfer is only tax-free under $10 million. Therefore, you can help your clients avoid or reduce capital tax by advising them to leave the property to their heirs.
Exemptions and Deductions for Homeowners
Homeowners qualify for some exemptions that real estate investors don’t. For example, when selling a home they lived in for two to five years, homeowners can get exceptions up to $250,000 ($500,000 for married people) of their profit.
Deductions for Rental and Commercial Properties
Real estate investors also get lots of tax incentives that homeowners don’t. For instance, they can deduct running costs, maintenance, repairs, insurance, property taxes etc from capital gains.
Like-For-Like Exchange
There is no capital gains tax if the client buys a similar property with the money made from the sale using a 1031 exchange. However, only real estate investors qualify for this exemption. Homeowners don’t.
Opportunity Zones
This real estate tax incentive also only applies to investors and not homeowners. The government created opportunity zones to encourage investment in certain, usually distressed communities. When your clients invest in these zones, they get incentives like real estate tax deductions, deferments, or exemptions.
Real Estate Income Tax
This type of real estate tax only applies to commercial and rental properties. The IRS created it to tax the income made off a property. Therefore, real estate income tax is like regular income tax. The same rules apply.
Deductions for real estate income taxes include mortgage interest, depreciation, operating costs (of supplies and services), and property tax.
Conclusion
This article is just an introduction to real estate taxes. Plus, the rules are always changing. So, you still need to encourage your clients to see tax accountants. Even better, recommend reliable accountants to them. Tax accountants understand tax laws better. So, they can help your client avoid tax troubles, get deductions, and even negotiate with the authorities for friendly payment plans.
However, until your clients reach that stage, help them by remembering that real estate laws vary depending on location and whether the property is a private or rental one. Despite everything, there are lots of tax benefits to buying and selling real estate.
