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

Much like in any other business, real estate investing would require you to pay different type of taxes. Two of which are income tax and real estate 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 subtracted from your income. It is charged on the financial income of individuals, corporations or additional legal entities. There are different systems of this type of tax coupled with different 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 business tax, earnings tax, or business income tax. Tax from the earnings of an individual is usually charged from his overall income. But in the case of corporations, the tax is usually charged from the net income of the corporation.

In regards to real estate investing, income tax can be found in when you are profiting or having income from your property. For example, you have invested in a piece of land and rented it, then you would have to pay income tax from the income you receive from your leasings.

This includes your gross income or all amounts that you got as rent. Rental income is considered to be any payment that you got for the usage or the occupation of your property.
Nevertheless, the favorable side effect of charging income tax in real estate investing is that you can subtract different expenses of renting property from your overall rental income. Usually, the rule is that you subtract your rental expenses during the year in which you pay them.

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

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

Property Tax

In real estate investing, you also pay real estate tax. This is also called millage tax. Property 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 essentially 3 different type of property. First is land, then your improvements to the land, such as buildings; and last but not the least, personality like manmade items that are movable.

Real property, real estate and realty are all terms used to refer to the mix of improvements and land. In real estate investing, the taxing authority usually requires or does an appraisal of the property’s monetary value, and then tax is examined in ratio to the value.
If you truly want to enter into real estate investing, then you should know what type of real estate tax that is used in the municipality you are buying.

One common mistake that investor make is their confusion between unique assessment and real estate tax. These are actually 2 different kinds of taxation. One is an ad-valorem tax, which extremely depends on the property’s reasonable market value for reason, while the other extremely depends upon a special enhancement that is called a benefit for its reason.

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