Just like in any other business, real estate investing requires that you pay multiple types of tax. Two that are very important in this business are income tax and property tax. Knowing the differences between the two and how they can impact your profit are very important.
The names do help to define the two different taxes, as expected income tax is a tax paid on money that you get in exchange for doing your job. It is also a tax that is paid by corporations and other legal entities. This tax can be proportional, progressive or regressive. When the tax is imposed on a business it is called corporate tax, profit tax or corporate income tax.
With respect to real estate investing, income tax is paid when you are profiting or getting income from your properties. The good side of having income from your properties is that you are also allowed to deduct certain expenses associated with the properties. These expenses might include advertising, cleaning, maintenance, insurance travel expenses and more. But it helps you to reduce the amount of income that you must pay tax on.
As a real estate investor you will also be responsible for paying property tax. The tax amount that you pay is based on the value of the property. In most cases, the taxing body will do an appraisal of the property and then the owner is taxed on a ratio of the dollar value of the property. The property tax is not a number that you will have any control over and not a figure that you can reduce such as with expenses on income tax.
Before you purchase a property, you should always investigate the property tax method of calculation in that area. You will want to have a good estimate of the property taxes to be certain that you have that number covered in your annual cost of ownership of the property. Many times you can view the previous property taxes by visiting the county assessor’s office website and entering the address or parcel number.
Understanding the different types of taxes and how they can impact your profit margin are critical to creating a good real estate investment strategy and formula. Each purchase might be slightly different but your formula and research should include most of the same information each time. As you get more familiar with the process, you will undoubtedly get faster at accessing properties and determining which are suitable for your investing purposes. Working with a skilled professional can help you to learn and refine your assessment process and ensure that you have a good understanding of all phases of the business. Visit www.azrealestatewholesale.com to learn about all of the information and assistance these professionals have to offer someone who is just learning the real estate investment business.