real estate taxes

What Are The 3 Types of Real Estate Taxes?

Real estate taxes can be a confusing subject for investors, especially if you’re just starting out.

Whether you’re investing in a starter home for you and your family, a beach home you can rent out for income, or flipping properties to make a profit on each deal, it’s important that you familiarize yourself with the tax regulations for your area.

There are three types of real estate taxes that investors will inevitably brush up against: capital gains tax, county property taxes, and net investment income tax.

In this article, we break down each of these taxes and situate them in the greater tax landscape.

What are Real Estate Taxes?

Real estate taxes are levied annually on the assessed value of a property. The state may also levy a property tax in addition to county and local agencies where the property is located.

The amount of the real estate tax is typically based on factors such as:

  • the type of property (residential, commercial, industrial, etc.)
  • the assessed value of the property, based on an assessor from your local county or community
  • any applicable special district taxes

Note that counties can vary widely in their tax rates, so you must be very clear regarding the specific tax rates associated with your area.

If you’re having a hard time wrapping your head around how a real estate tax is levied, you’re not alone! Most people don’t understand how the amount of taxes they pay on their property is determined.
One good way to understand how your real estate investments will be taxed is to ask your real estate agent for a quick rundown. Successful real estate agents know the value of their clients’ time and will be happy to help you understand the tax planning implications of your purchase, or point you toward a reputable tax advisor who can help.

Types of Real Estate Taxes

Now that we’re clear on what real estate taxes are, let’s dive into the three types of real estate taxes that investors will inevitably brush up against: capital gains tax, county property taxes, and net investment income tax.

We provide a breakdown of each below.

Capital Gains Tax

Selling and profiting from your real estate investments can be advantageous for your personal wealth, but the tax implications may not always seem straightforward. Every state has different taxation methods and regulations on real estate, which can make it difficult to understand how you will need to file when selling.

With that in mind, let’s look at some of the basics of taxes associated with the sale of your properties.

The capital gains tax means depends on several factors, such as:

  • What you used the property for
  • The length of time you held the property
  • Are you single or married?

When you sell a home that was used for business, you must pay taxes on the depreciation deductions you may have claimed throughout its ownership.

On the other hand, if you’re looking to sell a primary home that has been lived in for at least two of the past five years, you may be eligible for an exemption. If single or married and filing jointly, up to $250,000 or $500,000, respectively, can be saved.

Long-term investments come with lower tax bills of 0 to 20%, subject to your specific income tax bracket. Shorter-term investments are on the hook for 10 to 37%, again based on your income.

County Property Taxes

Another type of real estate tax is the property tax levied by your county. This will be determined based on the assessed value of a home in conjunction with an official auditor.

The due date of this tax varies from state to state. Various counties within the same state, particularly larger states like California, can have wildly different taxes to keep track of. Adding to its complexity are the yearly changes to these taxes.

One bright spot is that it’s possible to appeal the appraised value of your property by coordinating with your county assessor.

Net Investment Income Tax (NEIT)

This tax covers income from rentals and capital gains derived from sales of rental properties. It also covers the gains obtained by selling real estate properties.

The NEIT applies a blanket tax rate of 3.8% to all filers with over $200,000 in income (single) or $250,000 (married).

Deductions to Keep in Mind

Taxes can be a pain to deal with, but don’t worry: there are always plenty of deductions to go around, as long as you know where to look.

The most popular one, which excludes the first $250,000 to $500,000 in profit you receive after selling a primary residence, is limited to specific contexts.

Deducting real estate taxes is possible, but recent tax reform laws cap this deduction at $10,000.

Mortgage investment deductions now cover just the first $750,000 of debt. For rental properties, there is a new 20% deduction that adheres to some specific rules.

A final reminder: if you plan on navigating the thorny world of real estate taxes, it’s best to consult with a tax expert to form a cohesive plan of attack that gets you results. 

Now that you know all about the three main real estate taxes you’ll have to contend with as an investor, you can be better prepared when it comes time to file. Stay diligent and keep on top of any changes in the law, as they could affect your bottom line come tax season!

guest blog by:

Kat Sarmiento

Content Writer

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