Tax Planning for Investment Property
Are you interested in investing in real estate? If so, there are many tax and investment details that you need to familiarize yourself with. The last thing you want to do is buy property without knowing how it is going to affect you from an investment tax standpoint. Doing so could result in bad decisions and owing more in investment taxes than you ever thought possible.
To start, do you know anything about property transfer tax? There are 36 states that currently have a property transfer tax of between one and five percent. This investment tax is charged on the assessed value of the property at the time of the purchase. Do you know if you will have to pay this type of property tax? When it comes to taxes on real estate, this one can really make a dent in your bank account ― especially if you are buying an expensive house.
Capital gains tax is also something to consider. As you know, both short- and long-term capital gains tax can be assessed on investments such as real estate, stocks, and bonds. Before you buy or sell any investment property, consider whether or not you will have to pay capital gains tax. If you are buying property it is a good idea to have a tax strategy for how long you are going to hold onto it.
After buying an investment property there is a good chance that you are going to rent it out so you can make a few dollars. This holds true no matter if you are renting out the property on a regular basis, or just when you are not using it yourself. All rental income is subject to federal and state tax. Fortunately, if you know how to handle rental income properly you can greatly reduce the amount that you will pay in investment tax. Make sure your tax professional has experience dealing with this type of income. [See related article “Tax Help for Rental Properties”]
Getting involved with investment property is a great way to earn additional money, while also giving yourself a nice place to visit on vacation (if you desire). With that in mind, you have to better understand the many tax and investment details that are attached to your property and the way you are managing it. An investment property is not nearly as effective, in terms of making you money, if you are not taking full advantage of the investment tax benefits, such as tax credits or tax deductions, that you may qualify for.