Real Estate Tax Deductions – Saving Money, What to Look for, etc.

Saving on Taxes – You can make money, by choosing some of the infinite ways to save on your taxes. Here, an easy how-to guide for reducing the amount you pay on your real estate or property. From tax credits to deductions, and capital gains. Below you have an easy overview of what goes into your tax bill, and how to reduce the taxes you pay. Buying property? This is everything you need to know about additional costs and fees.

Saving Taxes on Real Estate Investment

Most people spend too much on taxes on their real estate. It’s not difficult to reduce your tax bill. Unless you plan to move abroad to a tax haven, and pay not taxes at all, it’s critical to understand the tax incentives in the USA. There’s many tax deductions you can apply, which reduce the financial loss on your tax bill. Owning real estate in the US is supported by the government, and therefore incentivized by taxes. Make sure to read the fine print though, as each state has its own tax structures and systems. In general, the following rules apply.

What taxes do you have to pay buying a home? Our article:

Tax Credit, Tax Deduction? What does it Mean?

It is important to distinguish tax credits and tax deductions, as well as non-refundable and refundable tax credits.

When you invest, you pay less in taxes, which is called tax credits. Refundable tax credits are money which you are entitled to no matter how large your tax bill, meaning if you get an $8.000 refundable tax credit, and only have a $5.000 tax bill, you will receive $3.000. A non-refundable tax credit only reduces the amount you have to pay in taxes, so you would not be entitle to the extra $3.000.

Tax Credits: Receiving money because of investments

A tax deduction on the other hand, applies to the income which you are required to tax. For example, if your income is at $100.000, but you receive a $20.000 tax deduction, the income which you are taxed for becomes $80.000.

Tax Deduction: Lowering the amount of income which is taxed

Realty Tax Tip #1: Reevaluate your Property

Most of the taxes you will pay on your property are property taxes. Property taxes are fixed rates which apply to the estimated value of your home or property. This value is often dependent on the buying price, yet typically this price will be increased by 2% to account for inflation by the county authorities. In some cases, for example, after renovations or natural disasters, the value can be re-estimated by an assessor. Therefore, it is possible to appeal the assessment of an appreciator.

Mortgage – Deductions or Credit?

When you invest in a home, you will likely open a mortgage. In short, a mortgage is a “secured” loan where you offer your real estate as collateral in case you are unable to pay back the money loaned.

Mortgage is much bigger and more important that the information we have in this article, so continue to

Mortgage Interest Credit

The government intends to support those who have to pay back loans. For this reason, when paying mortgage, you may be entitled to tax credit in proportion to the amount you pay in mortgage. You apply for a so-called mortgage credit certificate. A mortgage credit certificate is documentation to prove that you pay mortgage, and that you are eligible for this tax credit. The credit is limited to $2.000.

Mortgage Interest Deduction

Not to be confused with its brother, mortgage interest credit, this tax deduction is based on the interest you pay on a loan which is secured by your first or second residence. To qualify, you are required to have a qualified (meaning meeting specific requirements, e.g. ability to pay back, not an excess of x% debt, etc.) mortgage which on a home you own. Most people can deduct 100% of the interest which they pay on their mortgage, up to $750.000. To file for this deduction, you will need to file using the form 1040, found on the IRS website (Download).

  • Deduct 100% of interest up to $750.000

For a full run-through of mortgage interest and where to save how, our article has you covered

Deducting State and Local Property Tax (SALT)

It is possible to itemize state and local taxes on your federal tax bill. That means that you can deduct your state, county, and local property taxes from your federal tax bill. The single item deduction for state and local taxes paid is limited to $10.000 per tax return for single submitters, heads of household, and married taxpayers filing jointly. For married taxpayers filing separately, the cap is $5.000. This is possible regardless of whether you pay directly, or via an escrow account.

  • Limit of $10.000 for single submitters
  • Limit of $5.000 for married submitters each

Local Tax Breaks

As mentioned before, due to the US’ complicated tax systems with individualized tax structures for individual states, counties, and municipalities, you are likely entitled to many more tax breaks. For example, in California local tax breaks for real estate are included on a property if it is your main place of residence, for veterans, senior citizens, etc. Another example is the Homestead exemption, where some states reduce the taxable portion of your property’s value if it is your primary residence.

Real Estate Taxes – How to Save

Saving on your tax bill is the number one way to reduce costs as a home owner or prroperty investor. There are fewer easier methods to make money or reduce costs, than to simply receive them from institutions to which you pay bills. Be it receiving money directly from the government, or just paying less, it’s an important part of any knowledgable investor and homeowner.