If you are interested in investing in real estate in the U.S, it is paramount that you know the basics of U.S taxation and which taxes apply to you. If you purchase real estate that will be used to make profit and not be used as your personal residence, the said property is considered to be an investment property and as such, will be taxed accordingly. A number of laws and facts govern whether a non-resident investor is eligible for taxation or not. As a real estate investor, there are two major taxes that you should be aware of: Property Taxes, Income Tax and Capital Gains Tax.
These taxes are paid to the respective local jurisdiction e.g. city, council, where the said property is located. The dues are paid once a year and the taxes cover government services like fire, police, infrastructure maintenance and government administration. If your property has a mortgage, the lender pays the property taxes to the relevant authorities. They collect the monthly or weekly mortgage payments together with the prorated taxes, accumulate the collected payments in escrow and then submit to the authorities before the due date.
If your property does not have mortgage but is still managed by a private management company, the said company might pay the property taxes. It is important to note that failure to pay your property taxes on time could result in tax linen being attached to the property which could consequently cause you to lose the title to the property.
U.S Income Tax
All taxpayers are required to pay tax on any income generated in the U.S. Income tax is paid to the federal government (IRS), in some cases to the investors’ state of residence or at times the local jurisdiction like the New York City. If you own an investment property that you have rented out and you collect rent from tenants, you will be required to pay taxes on the rental income. All rental income should be reported to the IRS and failure to do this could result in additional penalties and further real estate taxes.
Capital Gains Tax
These are the profits you make from selling a real estate investment property. All profits from the sale need to be taxed by the IRS unless you reinvest the profits into another rental property.
Tax Cuts and Benefits for Real Estate Investors
- Tax deductions
Real estate investors can deduct expenses and costs associated with running their investment property when it comes time to file their rental income tax. Such deductibles include:
- Repairs and improvements to keep the investment property in an efficient and operational condition
- Depreciation on newly purchased items such as blinds
- Travel expenses in case you own a rental property out-of-state and you have to check on the property
2. No tax on appreciation
Real estate appreciation does not get taxed meaning you can grow your net worth with very little tax exposure by buying investment properties and holding them for years.
The Bottom Line
Real estate investment is a lucrative business, taxes notwithstanding. If you want to invest in real estate in New Jersey, consult with an experienced realtor andfeel free to contact us at NJLux today to learn more.