Owning a property is a major life accomplishment for anyone. As a property owner, there are several tax implications you should know about. Apart from your mortgage payment, there are taxes that must be paid such as property taxes and income taxes. Below are some of the common tax implications of owning a property.
Property Taxes
Property taxes are taxes levied by local and state governments to fund essential services such as police, schools, and road constructions. The rates for property taxes are variable and depend on the location and size of your property. It is important to determine the applicable property tax rate as it can significantly impact your finances. Property taxes can be paid in full or spread over several months in installments.
Mortgage Interest Tax Deduction
Mortgage interest tax deduction refers to the amount paid in interest on a mortgage loan. This is one of the major tax benefits of owning a property and is available only to homeowners who itemize their deductions instead of using the standard deduction. If you itemize your interest on a mortgage loan, it is deductible up to a certain limit. This deduction can help you save some money on your tax payments.
Home Equity Loan Tax Deduction
A homeowner can take out a home equity loan for home renovations, car purchases, or to pay off other debts. Interest paid on home equity loans is tax-deductible, provided the loan meets specific requirements such as being secured by your primary residence and being used for home improvements. Home equity loans with interest ranging from $100,000 or less can be tax-deductible.
Capital Gains Taxes
When you sell your property, you may be subject to capital gains taxes based on the difference between your proceeds and the adjusted basis of your property. The adjusted basis of a property includes any improvements you have made, the purchase price, and certain other expenses. There are exemptions available when selling a home as a primary residence. If you have lived in your property for two out of the previous five years, you can exclude up to $250,000 in capital gains taxes.
Rental Income and Taxes
If you rent out your property, the rent payments are considered income and subject to income taxes. Homeowners are required to report any rental income earned on their annual tax returns. Rental income is taxed according to your regular income tax rates, and you may also be able to deduct expenses such as mortgage interest, repairs, and depreciation.
Conclusion
Owning a property can be a good financial decision, but it also comes with tax implications. Familiarizing yourself with these tax implications can help you be better prepared financially and avoid any penalties from the government. Consider hiring a tax professional to help you understand these tax laws and maximize your deductions.
