What You Should Know about Tax on Investment Property
Two Types of Investment Property TaxThese two types will be of interest to you:
- Income Tax – This type of investment property tax covers rental properties. You must declare this in your tax returns, but it is not covered by VICA taxes. Pay it according to the right amount calculated from all your rental and royalty earnings. You can also apply deductible cost, which includes repairs to put a property back on its good original condition, as well as the interest you pay on the mortgage.
- Capital Gain Tax – In a nutshell, this is the tax that is calculated from the profit you get from selling any real estate property. If you own a property for less than a year and flipped it before selling, you must pay short-term capital gain tax. Thing is, you may need to pay 28% tax for it if you fall on the 28%-tax bracket. Owning a property for more than a year would make you eligible for long-term capital gain tax; meaning, you only need to pay 0 to 20% depending on your marginal tax rate.
Factors that Affect Investment Property TaxThe tax on an investment property that you must pay depends on a lot of factors. Other variables can also pull its value up or down.
- Property Tax – This is the yearly amount you pay for the property itself while considering its highest possible value. This can potentially add to your investment property tax, however, you can subtract it as long as you’ve implemented a unified tax assessment of the property.
- Value Depreciation – Any property can depreciate its value over its lifespan, and that includes investment properties. Thus, you can declare depreciation of value to your investment property tax, causing the IRS to subtract it from your initial tax accordingly. Note, however, that there are instances when the IRS won’t accept a lump sum of the deduction for a property over its lifespan or as long as you own it. Instead, they’d calculate the overall depreciation value of your property, then distribute it as a deductible over a few years of the amortization period. You can also do a cost segregation analysis to accelerate the depreciation.
- Property Expenses – You can actually enjoy tax deduction from common property expenses that you pay. These include mortgage interest, utilities, property taxes, advertising fees, employee payroll, management and legal services for your investment property, etc.
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