Real Estate Investing Guide: The Distinction Between Income Tax And Property Tax

Similar to in any other business, real estate investing would need you to pay various type of taxes. Two of which are income tax and property tax. To know the twists and turns of real estate investing, you should know what these taxes are, when do you pay them and their difference.

Income Tax

As the name recommends, income tax is tax that is deducted from your income. It is charged on the monetary income of individuals, corporations or additional legal entities. There are various systems of this type of tax paired with various degrees of incidence. Charging this type of tax can be proportional, progressive or regressive.

When tax is imposed on earnings of companies, then this may be called corporate tax, profit tax, or corporate income tax. Tax from the profits of an individual is generally charged from his total income. But in the case of corporations, the tax is generally charged from the earnings of the corporation.

In terms of real estate investing, income tax can be found in when you are benefiting or having income from your property. For example, you have purchased a piece of land and leased it, then you would need to pay income tax from the income you obtain from your leasings.

This includes your gross earnings or all amounts that you received as rent. Rental income is considered to be any payment that you received for the use or the occupation of your property.
Nevertheless, the favorable side result of charging income tax in real estate investing is that you can deduct various expenses of leasing property from your total rental income. Usually, the guideline is that you deduct your rental expenses throughout the year in which you pay them.

Expenditures that you can deduct include advertising, cleaning and maintenance, utilities, insurance, taxes, interest points, commissions, tax return preparation costs, travel expenses, rental payments and expenses on local transportation.

If you are a taxpayer under money basis, you generally report your rental income on your return in the same year that you constructively or actually received it. You fall under this classification if you report income the same year that you receive it, regardless of the month you made it.

Property Tax

In real estate investing, you likewise pay property tax. This is likewise known as millage tax. Real estate tax is said to be an ad-valorem tax, where a property owner pays depending on the value of the property being charged.

There are basically three various type of property. First is land, then your enhancements to the land, such as structures; and last but not the least, character like manmade objects that are movable.

Real property, real estate and real estate are all terms used to relate to the combination of enhancements and land. In real estate investing, the taxing authority generally needs or does an appraisal of the property’s monetary value, and then tax is assessed in ratio to the value.
If you actually wish to enter real estate investing, then you should know what type of property tax that is used in the municipality you are investing in.

One common mistake that investor make is their confusion in between unique assessment and property tax. These are actually two various types of taxation. One is an ad-valorem tax, which highly relies on the property’s reasonable market price for reason, while the other highly depends on an unique improvement that is called an advantage for its reason.

In real estate investing, the rate of your property tax generally can be found in percentage type. To compute your property tax, you multiply the assessed value of your property with the mill rate and then divide them by one thousand.