There are many costs involved when it comes to owning real property. Before stepping in as a real estate owner, it’s a good idea to understand what those costs are.
There are the expenditures involved with buying that building or land. There are the expenses related to maintenance and upkeep. Then there are the property taxes. But is that property tax direct or indirect? In almost all cases, your real property tax is considered a direct tax.
The Certainty of Taxes
According to Founding Father and politician Benjamin Franklin, “. . . in this world, nothing is certain except death and taxes.” This is especially true when it comes to owning property. Property tax is an ad valorem tax applied to real estate. In other words, it’s a tax based on the value of a particular property.
In most cases, property tax is determined by multiplying the current market value by an applicable tax rate. Taking this one step further, the market value is generally determined by a government-backed assessment authority, which conducts a property appraisal.
If you’re a real estate owner, skipping out on paying property taxes is generally not a good idea. The municipal or state authority would then be within its rights to impose a lien on your asset. This could interfere with the sale or refinancing of your real estate.
Direct versus Indirect Taxes
As mentioned above, your property tax will be a direct one. A direct tax is, as described by the term, paid directly to a governing entity that imposes it. As an individual taxpayer, you pay income taxes directly to the IRS (which represents the federal government). Unless you live in Alaska, Florida, South Dakota, Texas, Washington, or Wyoming, you’ll pay state income taxes directly to the state government.
You’ll also pay property taxes, transfer taxes, or capital gains taxes directly to the appropriate municipal, state, or federal authority.
Direct taxes can’t be passed on to someone else. This isn’t the case with indirect taxes, however. In fact, the indirect tax is often passed on to other parties. This is because indirect taxes come into play when it comes to supply chain issues.
For instance, if you’re upgrading one of your real estate properties, you’ll be buying supplies from various sellers. The price you pay includes sellers’ prices, plus extra. That extra will include the taxes that the sellers must pay to the state entity assessing it. This is an indirect tax, as it’s been passed to you as part of the purchase price.
Know Your Taxes
If you decide to own real estate, you need to be ready to pay taxes on your property or properties. Those taxes might be obvious, which is the case with direct taxes, such as property taxes. Or they might be built into the cost of property operations, which is the case with indirect taxes.
As always, if you have any questions with property ownership – and property taxes – be sure to share them with your tax professional.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice, meeting the particular investment needs of any investor. Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation. There is no guarantee that the investment objectives of any particular program will be achieved.
