The Taxes That Affect Real Estate Investments

If you are interested in investing in real estate, you will be subject to federal and county taxes imposed on the property itself, as well as on your income from the investment. Depending on how long you hold the property, the Internal Revenue Service may assess short-term or long-term capital gains taxes on your profits from real estate transactions. You will also incur local property taxes, may need to plan for estate taxes.

Property Taxes

You will be subject to local and county property taxes in your state for any property that you own. Property taxes are inherent in real estate investments. The amount of property taxes assessed on your property depends generally on the market value of the property, though other factors can affect property taxes, depending on the jurisdiction. Each year, the tax assessor will consider any improvements on the property, including new structures and demolition of structures, to determine if the tax amount will increase or decrease from the prior year.

Short-Term Capital Gains

If you purchase investment property and resell the property to earn a profit, which is known as "flipping," the investment profit will be treated as a capital gain. If you hold the property for a year or less, you will be subject to the short-term capital gains tax. For short-term capital gains, you will be taxed at your ordinary income tax rate. Depending on your income tax bracket, your net capital gains tax may be as low as 10 percent or as high as 35 percent on the investment income.

Long-Term Capital Gains

If you purchase a property and hold it for more than a year, you will be subject to the long-term capital gains tax, per IRS regulations. Your tax rate on long-term capital gains may be 15 percent or lower. The tax rate will depend on your income tax bracket. Some people may also qualify for a zero percent tax rate, especially if their ordinary income tax rate is lower than 15 percent.

Sales Tax

Beginning in 2013, there is a 3.8-percent Net Investment Income Tax on real estate investment income. It does not affect real estate income incurred prior to January 1, 2013. This tax only applies to individuals with an adjusted gross income of $200,000 or higher, and married couples filing joint returns with an adjusted gross income of more than $250,000. The 3.8-percent tax rate applies to the lower amount between the investment income amount, and the excess amount of the adjusted gross income that is higher than $200,000 for individuals, or $250,000 for married couples filing joint returns.

Estate Tax

Federal estate taxes are included with your right to transfer property at your death. The amount of the estate tax is calculated based upon the value of the estate. Real property that is included within the estate will be valued at its fair market value at the time of your death.


About the Author

Marie Huntington has been a legal and business writer since 2002 with articles appearing on various websites. She also provides travel-related content online and holds a Juris Doctor from Thomas Cooley Law School.