If you recently made the jump from renting to homeownership, congratulations!
While you probably have a mortgage, you can still celebrate no longer having to pay rent.
Then you find out that you still have to pay a quarterly or yearly amount for the privilege of having the property.
This time, instead of paying the landlord, you’re paying the city.
You don’t have rent anymore – you have property taxes.
What Taxes Do Property Owners Have?
Whether you live in the property you own yourself or rent it out to others, you will pay property taxes on land or buildings you own.
Higher-value properties pay more in tax than rural or less improved ones.
This money is paid to the city and generally goes to fund city services such as fire departments, libraries, and schools.
Sometimes, there are also property taxes paid on the purchase or sale of a property.
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In addition to the local property tax, there are also state and federal taxes that may be applicable to your property ownership.
These can include capital gains tax on the sale of your property.
Tax Reducing Strategies
As a law-abiding citizen, you cannot avoid paying these taxes – or risk losing your property.
However… There are ways for property owners to reduce the tax they owe.
This can depend on several factors:
- The property owner’s status
- The property’s main use
- The overall market around the property.
Let’s look at some ways to reduce the amount of property tax and other related taxes you may owe on your property.
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Homestead Exemption
If you own the property and use it for your primary residence, you may qualify for the homestead exemption.
This is a property tax reduction used by most states and cities.
The homestead exemption allows you to protect a portion of the value of your home from property taxes.
For example, if your home would normally be assessed at $150,000 for tax purposes, a homestead exemption might reduce the taxable value of your home to $125,000.
Exemptions for Specific Classes
Some states and cities also allow additional reductions in property tax for certain groups of people.
Disabled Persons
Some areas offer a property tax exemption for disabled citizens. This may be specifically for disabled veterans, but may also include other permanently disabled people who cannot work.
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Each city will have different regulations.
Low-income Exemptions
Low-income areas of the country, or cities with low-income sections, may offer a property tax exemption to empower lower-income individuals to become homeowners.
This is an income-based exemption.
It may be a “sliding scale” where the property tax owed is based on the owner’s income.
Again, this will vary by location – consult with your local tax authority.
Senior Citizens
Many cities also offer a property tax exemption for senior citizens.
This is based on age – it may follow the Social Security age.
It may or may not be able to be combined with a low-income exemption, although most cities allow only one.
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Agriculture
Many states also want to encourage agricultural land use.
If people use their property for farming, especially growing beyond their own personal needs, they may be able to get a reduction in their property taxes in return.
Tax Reduction Strategies for Landlords
If you own an income property that is not your personal residence, the strategies we’ve discussed likely won’t work for you.
However, there are other strategies you can use to reduce your taxes as a business owner.
The US government and the IRS want to incentivize citizens to provide housing, so they do provide tax deductions to landlords.
Depreciation
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The IRS allows landlords to depreciate the value of their property.
This means that they get to “subtract” a portion of their property value every year, and deduct this amount from the income they earn from the property.
This reduces the amount of income tax they have to pay on their rental property income.
Qualified Business Income deduction
On top of depreciation, landlords and business owners can also qualify for the Qualified Business Income (QBI) deduction.
This allows business owners to exclude up to 20% of their business and property income from taxation for the year.
Again, this is an incentive for people to become business and property owners.
1031 Exchanges
1031 exchanges are a way for property owners to make a “trade” from one property to another.
If you sell a property, you usually have to pay a certain amount of capital gains tax on the increased value of the property.
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However, if you immediately use your proceeds from the sale to invest into another, similar property, a 1031 exchange allows you to avoid that capital gains tax.
This only works if you purchase a similar property: a commercial property to another commercial one, or a residential property to another residential one.
FAQ: What is the difference between a deduction and an exemption?
A deduction is a part of the tax that you are allowed to subtract from your total tax due. An exemption is a portion of the tax that was never added to your bill in the first place.
