Tax Laws Every Austin Property Investor Should Know
Investing in real estate can be a profitable venture for many. Real estate investment provides different avenues for income, which can be either passive or income gained from property appreciation.
Like any other investment, real estate is subject to tax. Taxes tend to reduce the amount of income you earn but there are also certain tax benefits that can be utilized to the advantage of an investor. It is therefore important to understand these taxes and their implications on your investment property.
In this article, we have prepared a description of some of the important taxes in property investment that every landlord and property investor should know.
Real Estate Income Tax
The income from rental real estate is considered to be passive income by the IRS. This is significant because passive income is not subject to Medicare or Social Security taxes. The definitive factor is, however, whether you participate in business or not. To find out, you can take the material participation test.
Property Taxes
These are imposed by the state and local governments to pay for services within the locality. Property taxes are based on the appraised value, which includes the land, buildings, and improvements.
Capital Gains Tax
These are imposed on the seller of a property after a real estate transaction has occurred. Capital gains taxes are charged on the profit that was made from the sale.
The profit, or capital gains, is found by subtracting the total cost of the property from the price of the sale. The cost of the property can be calculated by adding the acquisition costs and the cost of improvements minus the depreciation.
The tax rate involved depends on whether the capital gains were short or long-term. Short-term capital gains only apply if the property was owned for less than one year and the tax rate applied is that of ordinary income tax. Long-term capital gains are however charged at a lower rate, depending on the amount of taxable income.
Business Income Tax
Rental real estate may, in some instances, be considered to be a business. This mainly occurs when you provide additional services such as a bed and breakfast. By providing these additional services on the premises, you participate in business hence the implication of business income tax.
Net Investment Income Tax
This tax is imposed when you use an investment vehicle to invest in real estate. Taxes are charged on the interest or dividends earned and the rate applied varies depending on how much you make. The IRS outlines the requirements for paying this form of tax on its website.
Individual Income Tax
If you invest in property without actually having any ownership in the property, the income or any interest you earn from the investment is taxed as regular individual income. The tax rate used in this case would be that of any other ordinary income.
Conclusion
Understanding the implications of taxes on your property puts you in a better position to make the most of your investment. For more information on how these taxes apply to your investment and on how to benefit from tax deductions, consult a reputable tax professional.
At Chris Price Realty, we can help you secure a great deal on your next property. Reach out to us today for unparalleled real estate brokerage services in Austin, TX.