Whether you are thinking of buying your first home or are hoping to upgrade to your dream property, you will want to be prepared for the taxes that come along with it. If you do not do your research and know what to expect, you could wind up in an unexpected situation where one of these top four taxes may come into play. Be sure to consider your financial situation and ask your real estate agent questions about taxes when you search for a new home. Expert Steve Schmitz real estate will guide you through the process and answer any concerns. You can also check any possible deductions available to you through the IRS. Here are some of the top taxes to know about:
1: Property tax
Property taxes are taxes on your own real estate that usually go toward the city’s public schools, fire, and police departments. In most states, property taxes are determined by the assessed value of your home. An assessor will walk through your home with you and determine the value of the property. This means that properties that have higher values will be taxed at a higher rate. However, if you are paying high property taxes, it is always a good idea to check with your local tax assessor and make sure they have your most up-to-date information.
If you have purchased a new home or made any other major changes to the property, you may be eligible for an assessment review and possible reduction in future years. Also, remember that not all homes are assessed equally; some homes may be assessed at different rates due to unique qualities like location, size, or age. For example, newer homes might be assessed lower than older ones because there is less resale value for them on the market. Plus, this is usually also true for houses located in suburbs or rural areas as opposed to cities. For example, suburban homes can often be worth less than their counterparts in more urban areas because of factors such as schools and nearby amenities.
2: Federal income tax
For federal income tax, the first thing you need to do is figure out how much money you make in gross income during the year. If your annual salary is $50,000, then your taxable income would be $50,000. Once this amount is calculated, different deductions can be taken into consideration, such as exemptions for dependents. These may include things like education credits, the earned-income credit, the child care credit, and more.
One way to reduce your taxable income is by contributing money to a retirement account like an IRA or 401(k), which will reduce your yearly taxes but also lower the number of funds available for retirement. Another way is the mortgage interest deduction, another common option that homeowners should take advantage of because it lowers their taxable income and may even save them money. You can look on the IRS website to see any deductions you may be eligible for.
3: Capital gains tax
One of the most important taxes for homeowners is the capital gains tax. This applies when a homeowner makes a profit on their home sale. If you sell stocks or investments at a profit, then those profits will most likely be subject to capital gains tax if they exceed certain thresholds set by Congress every year. It is important to know what assets will incur this type of tax and what threshold levels these assets must reach before paying said taxes.
The capital gains tax rate is equal to your top income tax bracket, but with some exceptions: if your home was used as your primary residence for at least two of the past five years, then you can exclude up to $250,000 in profit from taxation. The IRS also allows homeowners who are 55 or older to exclude up to $500,000 of home-sale profit from taxation, as well as those who are involuntarily separated from their homes by foreclosure or disaster.
4: Sales tax
One of the most popular taxes for homeowners is sales tax, which is collected on new construction, land sales, and many other types of property transactions. State tax rates are affected by what is known as the state rate and the local rate. The state rate is set by the state legislature and applies equally across the entire state. You can contact them directly to find out what your city's local sales tax is.
Sales taxes are collected at different rates depending on where you live, so be sure to ask your real estate agent before making any purchase. It is worth noting that this is one way that local governments can make up for budget shortfalls resulting from low property taxes and other sources of income. Another point worth mentioning is that some of these funds go toward schools, public safety, and infrastructure.
Higher sales taxes typically mean better school districts. While a heavy sales tax might put off some home buyers, others might find the deal worth it when considering higher education, better roads for locals to drive on, and more. It can be important for homeowners to keep these facts in mind before deciding where they want to live.
These are some of the top taxes you will want to be aware of as a new homeowner. Each is different and will be tailored to your property’s value as well as your taxable income. Be sure you are aware of the local tax requirements as they differ from state to state and city to city. Talk with your real estate agent about any taxes that would come with a property you are interested in purchasing, and ask any questions you are unsure of. Your real estate agent will guide you through the process of buying a new home and can point you in the direction of any resources you may need. Contact Steve Schmitz if you are interested in Edina real estate, Eden Prairie real estate, or homes for sale in Minnetonka.