How Real Estate Helps With Taxes. When you sell your home, there are several things that can affect how much money you receive in capital gains or income. One of these is whether or not you’re considered an owner-user of your own house or if you’re classified as a tenant.
If you fit into the first category, then you may be able to exclude certain costs from your taxes when you calculate your overall profit.
This article will go more in depth about what those costs are so that you know where tax savings may come up for you. But before we get into specific examples, let us start with some general information about why this matters and what types of houses qualify as “owned” by their owners.
General properties of owning vs. renting
As mentioned above, one important factor in determining which classification someone falls under is whether they consider themselves an owner-user or just a tenant. This has significant tax implications because depending on your classifications, you may be able to reduce or even avoid paying income or property taxes altogether!
Here, we will talk about some basic definitions of each type of person and some reasons why having either status could matter to you. After reading this, see if you yourself fall into one of the two categories and determine if being categorized as such would benefit you monetarily.
Capital gains tax
The other major type of income that most people will face is what’s called capital gain or capital appreciation. This occurs when your property (or investment) increases in value due to rising market conditions, growth trends, or both.
A proportionate share of the increase in value goes to you, the owner, as “capital gain.” For example, if your home doubles in price, then your personal net profit may be half of the total cost!
This can skew how you calculate your taxes depending on whether you are in regular income tax brackets or high-tax ones like we discussed earlier.
Some experts recommend timing the sale of an asset (like a house) to maximize capital gain potential. A quick sale means less time exposed to increasing values, which could reduce overall profits.
However, this also depends on your goals. If you want to quickly re-invest the money in more lucrative assets, then selling soon after buying might make sense.
When you sell your home, you are usually required to report it as such in your income taxes. What most people do not realize is that depending on how long you live in your house, what kind of renovations you make, and whether or not you rent out a part of your home, you can incur additional taxation when selling and/or buying a new residence.
When you sell your current house, you have two main types of income reported: capital gains and business profits. Capital gain means money earned from the sale of your house, and typically comes down to three things: The cost to buy the house, any improvements you made to it, and the sales price you got for it.
The IRS considers one of these factors significant enough to include in their calculations when determining if your house was worth living in longer than six months or not. They assume that if it’s more expensive to maintain your current house than to find another place to live, then it’s likely your house will be lived in for less time than anticipated.
This results in higher taxable income because they consider the initial costs to own your house to be investments instead of expenses. All those upfront costs get included in the calculation of your “cost basis,” which is the lower number you use in calculating your overall profit.
Social security tax
The other major type of income that can have a large impact on your taxes is the so-called _social security tax_. This is typically referred to as the FICA (Federal Insurance Contributions Act) tax, which includes both an employee’s Medicare fee and an employer’s contribution towards health benefits for employees.
The former comes in the form of an annual 2% payroll deduction from each worker per their respective company. The latter comes in the form of either a higher monthly insurance premium or a yearly additional cost sharing for medical coverage.
In fact, the average one person in America has two bills made up of these two components every month! That equals to around $200 per year being deducted directly out of your pay check, which can add up quickly if you are paying high premiums.
Landlords are particularly vulnerable to this tax because most landlords do not include the costs of social security fees when calculating their gross rental income online property management software. As such, it becomes very difficult to accurately estimate how much money you will be leaving behind after expenses.
Fortunately, there are some strategies that even smart investors may not know about that can help reduce your exposure to this tax. One of those strategies is owning a low income house or apartment.
Owning a 1-, 2-, or 3-bedroom apartment or house with no more than three rooms per bedroom really decrease your exposure to the social security tax.
If you’re in very expensive medical debt, your tax situation can get even more complicated. A large portion of individual income taxes is paid for health-care related expenses.
Medical costs are some of the highest expense items that most individuals have when it comes to personal finance. Between doctor visits, testing, medicine, and other treatments and procedures, they rise quickly.
In fact, one study found that nearly half (46%) of all physician office visits were due to financial issues.1 More than two thirds of those patients didn’t receive care because they could not pay their bills.
Fortunately, there are ways to reduce these costs through insurance or other means, but first we should discuss what kind of benefits you may be able to deduct from your income taxes.
The most important thing to know about tax savings via owning or investing in real estate is what’s called your cost basis. What this means is how much you paid for something, including any financing costs like down payments.
In fact, some experts say that paying too high of a price for a property can actually increase your taxes later!
That’s because when you sell it, you have to include the original cost as well as its growth in value in your taxable income.
So even if you made a great profit selling it, you could still be paying more in taxes due to the higher cost base.
On the other hand, buying a lower priced house may mean you need to spend more money to make it profitable and pay higher taxes, but at least you’re not wasting money.
Taxes depend on two things: how wealthy you are and whether or not you earn enough money to be classified as rich.
But aside from those factors, the cost basis of an asset comes into play when calculating how much you owe in income and/or capital gains taxation.
One of the biggest ways real estate can help you lower your taxes is by locating your most valuable assets in it.
By owning a house, for example, you can reduce your capital gains income by renting out an apartment or house you own.
You can also use the profits from these rentals to offset some or all of your rental losses from before when you owned the home.
In fact, according to The Wall Street Journal, one expert says that if you’re able to generate enough passive income, tax savings could outweigh the extra cost of buying versus renting.
That means instead of paying more in property taxes each year, you could be leaving money behind.
And while this may seem like a trick way to save tax dollars, there are rewards to being rich. So don’t worry about not spending what you have just yet!
Another good reason to invest in real estate is that it is a stable investment.
Instead of fluctuating in value like other investments, homes usually increase in worth over time. This stability typically makes them much safer than investing in stocks, for instance.
Records are very important when it comes to real estate. This includes mortgage documents, property records, and leases.
Mortgage loans can contain information about your tax bill, such as whether or not you made enough money to be considered wealthy.
By knowing this, we can determine if you paid too much in taxes. Or if you underpaid due to our new understanding of how real estate helps with taxes.
A seller may try to conceal their wealth by only listing their house for a low price. But all sellers reveal some amount of info during the sale process, such as what type of home they want, how many bedrooms and bathrooms they need, and if they have children.
This info allows us to calculate how much money each person in the family makes so that we can estimate their yearly income.
Know your tax situation
The timing of when you sell your home, how you use it while you are still owning it, as well as what kind of income you have can all play an important role in determining how much money you owe in taxes.
Most people realize that selling a house will cost you some money in fees, but sometimes sellers are taxed for their homes even before they put them up for sale! And although most people think that capital gains occur when you actually sell a property, there is more to it than that.
There are two main types of capital gain: passive and active. A passive capital gain happens when you don’t perform any actions to increase the value of your investment, like buying a stock or investing in real estate. An example of this would be if you owned a rental apartment that you lived in, and you left it vacant until you sold it.
An active capital gain occurs when you do something to improve the value of your asset. For instance, if you invest in real estate, you could purchase a house next door and renovate it, which both increases its overall worth and yields a higher dividend (profit) per area.
Some examples of active investments include: renting out an apartment, paying to have repairs done, or putting in new fixtures and decorations. What matters is whether these changes make the property more valuable and profitable.