Real Estate Taxes by Sandra Cabra. Most of us could easily agree with Benjamin Franklin statement, "Nothing is certain, but death and taxes". Property taxes are for the most part a hassle and they burden the home owners, but if understood, they do not need to be. Owning and selling real estate carry with a tax implications and benefits that need to be reported.
Real estate taxes are allocated to the school district, police, and fire departments, relative libraries among other local community needs. Establishing the benefits the property taxes bring to a community makes them less burdensome and understanding the process is the first step in accepting our financial commitments to the local government.
The key to successful tax preparation is organization and documentation. For purposes of organization, create a filing system for all your documents. This not only helps you practically but emotionally as well. Separate personal from real estate documents, income from expenses, and categorize according to your particular situation. You may want to use previous tax returns to get an idea, even if the current year does not mimic the past.
Property taxes are determined by multiplying the jurisdiction mileage rate or tax rate by the properties assessment value worth established for tax purposes by a County Property Appraiser. The mileage rate is calculated in order to fairly distribute the needs of the community among property owners. The budget for community services is established and then the portion of it funded by property taxes is determined.
However, there is a major distinction. Income taxes are reported on an annual basis to the Internal Revenue Service or IRS; while property taxes are assessed and billed on an annual basis by the County or the Municipality where the property is located. Property taxes are governed at a local level for assessment purposes. Specific guidelines applied and provisions and laws may change from one year to the next. It is always recommended to consult your tax advisor for guidance.
Exemptions applied to property taxes are subject to the specific area and depend on the home owner situation. These are dollar amounts deducted from the assessed value to decrease the taxable amount and give the home owner a tax break. These may include, but are not limited to, Homestead Exemptions. For example, in Florida it is $25000. Disabled Veteran Exemptions; age 65 and older, widows and widowers and people with certain disabilities, among others. Taxes are paid based on the assessed value minus the exemptions the home owners qualifies for. Sandra Keil, CPA of Sandra P. Keil CPAPA in Palmetto Bay in Florida insists that people should learn about the exemptions and apply for them.
Everyone is aware of the homestead exemptions but very few know about the others. According to Keil, it is never too late. Every year is a new opportunity to apply. If you want to protest the assessed value of your property, contact the County Property Appraiser and request an adjustment. If rejected, an appeal could be filed. If the assessed value is not reconsidered, a litigation process with the court could be established to reassess the amount. Check with your local office for procedure details and the time limitations.
Most expenses related to a residence purchase are not tax deductible. Nevertheless, if you such as commissions, attorney fees, recording fees, abstract fees, surveys, title researchers, owners title insurance policy and transfer taxes are added to the basis. What you paid including any dead assumed and closing costs of the property. On the Federal income tax level, real estate transactions and home ownership may result in tax implications. Some deductions related to home ownership are allowed if they are incurred during the tax year.
Real estate taxes, these are deductible, if paid during the year including those Pro-rated and collected from you and itemized on the closing statement. These are reported on Form 1098 Mortgage Interest Statement; the annual statement from the financial institutions holding the mortgage, or on your County Real Estate Tax Assessment Statement. We advised that the pro-rated amount at closing is generally not included on Form 1098. People delay their property tax payments. Make them after December 31st and they do not realize this prevents them from qualifying for their deductions. Keil says, only taxes paid during the year are applicable.
Local taxes and assessments. Local taxes are deductible only if applied to every property in the jurisdiction and if based on the assessed value. Assessments are not deductible and maybe added to the cost basis of the property. Payments for services even if it included on the property tax bill are not deductible.
Mortgage Interest, interest and points. Interest prepaid at closing to decrease the interest rate are deductible on the principal residence or second home. However, points paid when refinancing are paid over the life of the loan and can only be deducted on a Pro-rated basis during the whole term. If a home owner refinances and uses the funds to make improvements on the home, the points paid could be deducted that same year. If only a portion of the money was used that same portion of points could be deducted.
Repairs and improvements. Only improvements that add value to the property are added to the cost basis. Maintenance and repairs including labor are not tax deductible.
Casualty or theft loss. The portion not covered by the insurance is deductible. This kind of loss reduces the cost basis of the property by the amount claimed.
Rental income. For tax purposes rent payment should be included in your gross income and expenses related to renting the property could be deducted. Rental income is to be reported of the year was received, regardless of the period it was paid for. This includes advance rent and security deposit only if it was used because the tenant did not comply with the terms of the agreement. If a tenant paid for some of the unit expenses that were the landlord's responsibilities, the payment should be included as rental income and the expenses deducted as rental expenses. Likewise, if the tenant pays with services instead of money, these should be given a fair market value and included as income and the services as the rental expense.
Vacation homes. The expense of a second home that also produces rental income should be divided between personal and rental use. If the expenses for the rental are higher than the rental income, you may not be able to deduct all of them. Make sure you separate personal use and investment properties for tax purposes. Different tax guidelines apply even though both may reflect on your income tax return.
Aside from the clear benefits of owning real estate, it also offers a tax referral option, the 1031 exchange. 1031 refers to like-kind exchanges, which involved properties of the same nature or character; even if they differ in grade or quality. The properties should be for investment or business purposes. In order to qualify for deferral of capital gain tax, the value of the new investment should be at least equal or higher than that of the original one.
However, the number of properties on the exchange is flexible. One property for two or more, or several properties for one. For the exchange to be applicable some specific requirements need to be met. Nevertheless, the advantages from old investment as well as business and the economy. Preparing for your taxes and understanding your responsibilities and rights provides a valuable sense of accomplishment and control.
To learn more visit the IRS website www.irs.gov. This site provides easy to understand information, forms and guidelines on how to prepare them. Also, there contact information is posted and consumers may call with specific questions. A live representative will handle the call. On the local level, make use of your local assessor's office resources, newspapers and tax bulletins, the internet, and any source that may provide you with information. The time spend will be well worth a lifetime of minimizing the dreaded tax season syndrome.
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