If you’re new to investing in real estate, you’re probably also new to doing taxes for real estate. And it is a completely different ball game.
Missing a crucial deduction can literally cost you hundreds of thousands of dollars, and sink your return on investment.
That’s why we’re here to help. Here are the answers to some popular taxes for real estate frequently asked questions that we have encountered over the years.
We chose to explore a few areas that can literally make or break your tax year.
Prepaid Property Taxes
The IRS allows you to pre-pay the next payment of property tax before the closing of the current fiscal year if you’re looking to increase your itemized deductions for this immediate year.
Property taxes are deductible in the year you pay them, as opposed to the year they’re technically due. So you could choose to pay your spring property taxes in December, to get it in before the current year ends.
This increases how much property tax you paid during the year and lets you deduct more.
How Long Do I Hold Onto Records for Taxes for Real Estate?
To cover all your bases, you’re going to want to hold onto all copies of your property tax statements and any canceled checks to show you paid these taxes.
Also, hold onto your escrow documents the actual property purchase/sale because to prove additional payments of property tax that you can deduct.
The Property Owner Is the Tax Deductor
The IRS is steadfast in that you need to own the actual property and it needs to be in your name for you to be able to claim the deductibles.
That means if you bought a new house for your son or daughter, and pay their property taxes for the first year or so while they get on their feet, you’re going to have to put the house in your name to get the property tax deduction.
The same is true if you’re helping out an aging parent by paying their property taxes. So keep that in mind.
How Are Property Taxes Split Between Buyer and Seller?
The IRS is very specific on how to split the property taxes to both the buyer and seller.
Basically, the taxes are typically split in a way that the buyer and the seller are each paying their portion of taxes, for the actual part of the property tax year that they owned the property.
Your share (and only your share) is tax deductible, to be used how you see fit.
Paying Your Property Taxes Through Escrow Accounts
Of course, it’s possible to deduct property taxes you paid directly to your tax authority. But it’s also possible to deduct payments that were made through your escrow account at the settlement or closing.
You may be paying property taxes through an escrow account included in your mortgage payments. Your lender would remit payment to the tax authority on your behalf.
Keep in mind, you can deduct what your lender pays in property taxes.
We Can Help You With More Than Questions About Taxes For Real Estate
We can help you get the absolute most from your investment with helpful tips and advice on our blog.
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