Tax Obligations For U.S. Real Estate Investors

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What is the tax advantage of rental property?

It is the tax shelters and because of tax shelters like depreciation, the repairs and maintenance are expenses, the interest of the mortgages that are also expenses it creates a reduction of the profits of the activity and many times that activity is a loss and because of that loss it creates a credit in your tax return, and now because you have loss it means a reduction of your income you pay less taxes. Second advantage is passive income since it’s a passive activity. If you invest in a business that you have to work for you will pay double tax, you have to pay taxes for the income of the activity and also pay self employment taxes if you have the company in an LLC. But when you invest in Real Estate you only pay income tax, because rental activity creates passive income.

Are real estate taxes deductible?

Yes they are deductible 100% if the activity is for rental. If you rent the property then 100% of taxes are deductible, if you do not rent the property they are not deductible.

What determines real estate taxes?

The zone for example, counties in the US are in charge of the administration of the real estate property tax, so depending of the location of the property and the value, they will create a tax that will allow the functioning of the schools and the production of the services in that area, that will be the maintenance of the parks and streets with the objective of providing a service to the community. However if you live in that property the taxes are deductible but they must be higher than the standard deduction. So for example, you and your spouse have 12 thousand dollars each of standard deductible, so 24 thousand dollars total, that will be deducted from your income and then you will pay taxes, if you have taxes that are over 24 thousand dollars then it’s good to use those taxes as a deduction instead of the standard deduction but most of the time for many homeowners property taxes are not over 24 thousands dollars unless you live a very expensive property.

How can I avoid real estate taxes?

There is no way to avoid that, then do not own real estate.

How can I own land and not pay taxes?

It’s impossible because lands are also taxable, the county also assesses taxes on both land and property.

How often are taxes paid on a house?

Every year and once a year taxes are assessed in the house and this changes every year. Whenever there is an increase in value of the house you will pay more taxes next year.

What passive income is not taxed?

They are always taxable, but for active or passive income.

Does selling a house count as income?

No if it is your residence meaning you live there. Even if it’s a second home and you live a portion of the year there. Whenever you sell the house and the capital gain is up to $500000 within 5 years of owning the house then there is no tax. If you rent the property, the gain is always taxable. Also, if the property gain id over $500000 you will always pay taxes on the portion that is over the $500000.

Do I have to report the sale of home to IRS?

No, if is your home you live or second home, you don’t have to report it. Although, the closing company they will report the IRS that you have received an amount of money from the sale of the property. You have to confirm to the closing company that that property is your residency.

Readers should note that this article is only intended to convey general information on these issues and that FAS CPA & Consultants (FAS) in no way intended for the contents of this article to be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services.  This article cannot serve as a substitute for such professional services or advice.  Any decision or action that may affect the reader’s business should not rely solely on the contents of this article, but should rather be consulted on with a qualified professional adviser. FAS shall not be responsible for any loss sustained by any person who relies on this presentation.  This article is subject to change at any time and for any reason.

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