Taxes Related to Real Estate 101 and Why You Need the Expertise of a Real Estate Lawyer and Realtor at the Same Time!
Real estate taxes or taxes related to real estate is overwhelming to most property owners. If you're feeling that way, you're not alone—but it doesn't have to be complicated to understand taxes when buying or selling real estate. Today we are not discussing the real estate taxes you pay to the county collector each December, these are other state and federal taxes that may occur in a real estate transaction.
Navigating real estate law and taxes is easier with a lawyer who understands the taxes and regulations. They can walk you through the process to make sure you don't overpay (or underpay and face penalties) when selling a home or buying a new house – or any other real estate for that matter.
Check out this guide to real estate taxes. If your real estate agent is not an attorney, you need to hire an attorney as well!
What Kind of Real Estate Taxes Can I Expect?
Working with an experienced real estate lawyer and your Realtor can help you know what taxes to expect and what you can expect when closing on a home. Whether you inherit a property or sell a house, you'll deal with some form of real estate tax.
Estate and Gift Tax
Gifting real estate is a great idea, but you need to make sure you deal with the potential gift tax. In 2020, the exempted value for the estate tax was $11.58 million. If you gift an individual real estate and want to take advantage of this estate tax exemption, your CPA or tax preparer would need to file the necessary documents for the tax year that you gifted the property. Not filing the necessary documents with the IRS could create a gift tax to the individual receiving the property.
Capital Gains Tax
You might have heard about the burden of capital gains tax when selling a house, but what is it? Selling a property for more than you paid for it means you made a profit known as a "capital gain." The government places a tax on that gain, but how much you'll pay and when you'll owe the payment depends on many factors.
If the house is your primary residence, you may be entitled to a capital gains exemption that is $250,000 for an individual, $500,000 for a married couple. Your primary residence is partly determined by the IRS as where you lived most in a given year. Then the capital gains exemption is evaluated by determining if it was your primary residence for any 2 of the last 5 years.
A real estate lawyer helps you estimate capital gains tax based on how long you've owned the house, the amount of profit, any expenses that should apply to your profit, and the current tax rates.
Capital gains tax primarily comes up with properties used for business, like a rental property, or a second home. However, your lawyer and something called a qualified intermediary may help you defer what you pay in taxes with a 1031 exchange. If you are lucky enough to make a large profit on your primary residence, sadly it won’t qualify for a 1031 exchange.
Rental Income Tax
When you own one or more rental properties, the rental income is also subject to taxation. This may be ordinary income or capital gains based on your level of involvement. With guidance from the right real estate attorney, investors can minimize the amount of tax they pay on income.
Expenses, repairs, fees to service providers, depreciation, and other costs can become valuable deductions when it's time to prepare taxes regarding investment property.
Get the Best Legal Help for Real Estate Taxes
Partner with the best legal help to navigate real estate taxes or taxes related to real estate! Our team is here to help you understand tax implications when buying, selling, or processing taxes for real estate. Contact us to learn more!