Pertaining to owning a home or investing in real estates, it is imperative to familiarize with the several taxes and other charges that are incurred in the property ownership. The terms property tax and real estate tax are often used and considered to be the same things However, these two terms are quite different in their application when it comes to taxation and payments.
In this article, the focus will be given to the differences between both taxes, methods how it is calculated and paid, and possible influence on homeowners and investors.
What Is Real Estate Tax?
Real estate tax often referred to as the real property tax is a special tax that is charged on the properties such as; houses, buildings and land. It is a type of singe-business tax which is too collected by local authorities starting from cities, through counties, up to towns to fund local services and facilities. The tax’s measure is ordinarily expressed on the basis of the percentage of the property’s value, and the taxes are ordinarily due and paid on an annual or semi-annual basis.
Real Estate Tax Examples:
- Supposing you hold a home which costs $500,000 and when it comes to tax on real estate the amount you have to pay is $10,000 per annum. You can fully deduct the $10,000 for federal income tax purposes meaning that $10,000 comes out of your gross income before being taxed.
- If you are a landlord with a rental house for instance, and you incur property taxes over your rental house, these are allowable losses on your tax return.
What Is Property Tax?
The term property tax is however more general, and is used to refer not only to the tax on real property but also on other assets like vehicles, boats or equipment among others. Property tax is another local tax; it is determined by place and the procedure of calculation and then payment is different. Sometimes there arise other charges known as the property tax which encompasses other charges like the school district taxes or even the special district taxes.
Property Tax Examples
- Vehicle property tax: Some of the typical taxes that most car owners pay are the state or local government set yearly vehicle property tax. This tax is considered as a credit in the computation of the Federal Income Tax return.
- Boat property tax: Boat property tax can be defined as the kind of tax imposed and paid for by a fiscal year by an individual’s state or local government on his/ her boat. Well, here is it, this tax is also, again, a tax you can compile on the federal income tax return.
How Are Real Estate And Property Tax Calculated?
These Taxes are computed by assessors to be a proportion of the value of the property. An assessor, who follows on methods that helps in arriving at the value of the property, multiplies the amount so reached with the tax rate to arrive at the tax amount. The tax, however, depends on the authorities and can also shift from one period to another.
How Are Real Estate And Property Tax Paid?
When it comes to property taxes and insurance, lenders establish an escrow account where Homeowners remit the Taxes where they act as a collection agent.
A part of the rent, in this case, is paid to the homeowner or property owner and then deposited into an escrow account usually on a monthly basis. The lender disburses the funds to the local government when the taxes are due.
Are Real Estate Taxes Deductible?
The fact that an expense is subject to sales tax means that the amount became deductible for the federal income tax return. The Tax Cuts and Jobs Act (TCJA) limited the property tax, with other state and local taxes, for the taxes filed in 2018. An ambitious piece of legislation limited a number of deductions, including state and local taxes and property tax to $10,000 ($5,000 if married filing separately).
The Similarities And Differences
Similarities
- People of every level of society pay Taxes and in addition they are also Levied by the local governments.
- Both Taxes are computed by the Local governments, in relation to the value of the property.
- Both generally are renewable annually or semi-annually.
Differences
- Real estate is specifically based on real estate properties while property tax also involves other categories of personal property.
- Real estate tax indicates the rate imposed as a percentage ratio of value of property intended for tax while property tax includes the rates chargeable as a percentage of the property’s value together with fees or assessments.
- Real estate is paid through an escrow account by homeowners and property taxes are collected directly by local governments.
Impact On Homeowners And Investors
Fees that are charged on homes and properties affects the owners as well as the investors in various ways:
- To the homeowners, the taxes makes the cost of owning a home higher. New tax rates or assessments can influence their monthly mortgage payments end up making adjustments to whichever is the more favorable as to either bring it in line with or knock it down to the other.
- Concerning revenue, real estate and property tax became influential components affecting the cash flow and the profitability of investors’ capital.
Learn more about such taxes in order to be able to make the right choice in situations when you are a buyer or seller of any real estate property or when you simply own such property. It will also enable you understand how these are calculated in order that you be in a position to make right decision whenever you are engaging in real estate.
Conclusion
Even though, real estate and property tax are both interconnected but the two are not synonyms. Real estate is a specific type of tax charged on real estate property while property refers to a more general type of tax that is charged on other properties apart from the real estate one. To understand how they function and how they are calculated and paid, it will be useful to clearly distinguish between these two taxes.
