What Is Property Tax?
A property tax is an annual or semiannual charge levied by a local government and paid by the owners of real estate within its jurisdiction. Property tax is an ad-valorem tax, meaning the amount owed is a percentage of the assessed value of the real estate.
Property tax receipts are the main source of revenue for most local governments in the U.S. They are used to fund schools, police and fire departments, road construction and repair, libraries, water and sewer departments, and other local services that benefit the community.
In common usage, property tax refers to a tax on immovable possessions like structures or land. Some local jurisdictions also assess property taxes on moveable property such as vehicles and industrial equipment.
KEY TAKEAWAYS
- Property tax is based on the assessed value of the property, which can be real estate or tangible personal possessions.
- Property tax revenue is the primary source of funding for local services in the U.S.
- Property tax rates vary widely in cities and towns throughout the U.S.
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Tax Benefits of Investing in Real Estate in India
Real estate investment in India offers a variety of opportunities for individuals seeking to grow their wealth and secure financial stability. The property market is a robust avenue for generating income and capital appreciation. In addition to the potential for financial growth, there are numerous tax benefits associated with real estate investments in India. This guide covers the various tax benefits of investing in real estate.
What is Real Estate Investment?
Real estate investment is the process of buying or acquiring a property to generate more income. It includes any building, property, or land that is immovable but transferrable. Real estate investments can be classified into residential, commercial, and industrial. Even though the initial investment in real estate is more, it is one of the best ways for capital appreciation.
What are Real Estate Investment Strategies?
There are various beginner-friendly ways for real-estate investing in India. Following are the most common ones –
- Rental Property
Purchasing a rental property not only helps you build wealth over time with the appreciation of the asset but also secure a monthly income source for yourself. This investment could be in a single-family house, multi-family residence, warehouse or a commercial property. This can be used for renting out to others. - REITs
REIT stands for Real Estate Investment Trust. These REITs run a number of real estate holdings warehouses, shopping complexes, residential building and hospitals. It is a type of business that manages and owns income-genrating real estate. It works in a manner similar to the share market. The investors can simply acquire REIT shares and earn profit from it without owning any physical real estate property.
What is Real Estate Tax in India?
Real estate tax refers to the tax levied on the gain from sale of a property, which is a capital asset. The gains from property sale are also known as capital gains.
Capital gains are the earnings derived from the sale of a capital asset – a residential house, business facility and a plot or land, when the sales price is more than the purchase price. These capital gains can be both short-term and long-term in nature depending on the time duration for which it was held. Long-term capital gains get taxed @20% depending on the tax bracket in which it falls.
The rental income earned from property is also taxed under the section 24 of the Income Tax Act in the hands of the owner. The rent received from leasing an unoccupied land is levied to tax under the head ‘income from other sources.’ The Indian income tax law allows a standard deduction of 30% on the rental income from the house property.
What are the Tax Benefits of Investing in Real Estate?
There are various advantages of investing in real estate. But it can be overwhelming to understand and discovering the potential solutions to your tax problems. Here is a list of the top tax benefits of investing in real estate –
- Home Loan Tax Benefits: If you invest in real estate by taking a loan, you can get multiple benefits on real estate taxes. Given below are some deductions you can claim on a home loan –
- Deduction on Interest Paid – If a home loan is taken for the purchase or construction of a house property then the assessee can claim a tax deduction. The interest on home loan EMI can be claimed as deduction from total income upto a maximum of Rs.2 lakhs. However, there is no upper limit for interest deduction on let out property.
- Deduction of Principal Repayment – The principal paid on the home loan EMI can be claimed as a deduction from the total income upto a maximum of Rs.1.5 lakhs. However, the house property should not be sold within 5 years from the sale date.
- Deduction for Stamp Duty – Apart from claiming a deduction for principal repayment, you can also claim stamp duty and registration charges under section 80C within the threshold limit of Rs.1.5 lakhs. However, these can be claimed only in the year of incurring the expense.
- Additional Deduction – The home buyers can also claim an additional deduction of Rs.50,000 under section 80E. However to claim this deduction, the loan amount should be less than Rs.35 lakhs and the property value should be less than Rs.50 lakhs and the individual should be a first-time home buyer.
- Additional Deduction u/s 80EEA – Section 80EEA allows homebuyers a deduction of a maximum upto Rs.1.5 lakhs. The stamp value of the property should not exceed Rs.45 lakhs, the individual should be a first-time homebuyer and should not be able to claim 80EE deduction to claim this deduction.
- Deduction for Joint Home Loan – If the home loan is taken jointly, then each co-owner can claim a deduction of upto Rs.1.5 lakhs under section 80C for principal repayment and upto Rs.2 lakhs under section 24B for interest on home loan.
- Standard Deduction: Standard deduction is a tax benefit provided on rental income in India. As soon as you buy a property, it is assumed that it will undergo repairs and maintenance. Even if there is no actual expense, you can still claim a deduction of 30% on the rental income.
- Depreciation: Depreciation can provide significant reduction in tax liabilities for homeowners. Real estate properties also suffer from wear and tear and require reinvestment in repairs and maintenance. The amount invested by the homeowner in repairs and modifications can be claimed as a deduction along with the depreciation.
In a country where property ownership is highly regarded, leveraging these tax incentives can prove to be a wise and strategic move for investors, ultimately making real estate one of the most attractive investment options in India. However, not everyone is aware of the benefits of investing in real estate. The best way to save taxes on real estate investment is to seek professional help.
Understanding Property Tax
Property tax is paid by individuals or legal entities such as corporations that own the property.
It is characterized as a regressive tax. That is, the same rate of taxation is applied regardless of the taxpayer’s income. The burden falls disproportionately on lower-income taxpayers.12
The tax is usually based on the value of the owned property, including land and structures. Many jurisdictions also tax tangible personal property, such as cars and boats. Property tax rates and the types of properties taxed vary by jurisdiction.
In most Organization for Economic Co-operation and Development (OECD) countries, immovable property tax represents a low proportion of federal revenue when compared to income taxes and value-added taxes.
The average rate in the United States is substantially higher than in many European countries.3 Many empiricists and pundits have called for an increase in property tax rates in developed economies. They argue that the predictability and market-correcting character of the tax encourage stability.
Hawaii!
The state with the lowest effective real estate tax rate i the U.S., at 0.29%. Alabama and Colorado round up the list of lowest rates.4
Calculating Property Tax
The amount owners owe in property tax is determined by multiplying the property tax rate by the current market value of the property. Most taxing authorities recalculate the tax rate annually.
Almost all property taxes are levied on real property, which is legally defined and classified by the state. Real property generally includes land, structures, and other fixed buildings.56
Ultimately, property owners are subject to the rates determined by the municipal government. The municipality appoints or elects a tax assessor who evaluates local property and calculates property taxes based on current fair market values. This value becomes the assessed value of the home.
In almost all local property tax codes, the owner has the right to formally contest the rate assessed. When property taxes are unpaid, the taxing authority may assign a lien against the property.
Property Tax vs. Real Estate Tax
People often use the terms property tax and real estate tax interchangeably. In fact, not all property taxes are real estate taxes.
Many jurisdictions also levy property taxes against tangible personal property. According to a report by the Tax Foundation, 43 states tax tangible personal property.7
Both types of property can be deducted from federal taxes. However, since the Tax Cuts and Jobs Act of 2017, the deduction has been capped at $10,000 per year for married couples and single taxpayers.8
So here’s the difference: Real estate taxes are taxes on real property only; property taxes can include both real property and tangible personal property.
Why Are Property Taxes So High in the U.S.?
According to the Lincoln Institute of Land Policy, four key factors explain why property taxes are relatively high in the U.S. and why they vary so greatly by state: property tax reliance, home values, local spending, and classification.9
What Cities Have the Highest Property Taxes?
According to a 2023 study by SmartAsset.com, the following cities had the highest tax rates as a percentage of assessed value:
- Rockford, Illinois: 3.04%
- Waterbury, Connecticut: 2.75%
- Bridgeport, Connecticut: 2.67%
- Aurora, Illinois: 2.53%
- Elgin, Illinois: 2.53%10
What States Have the Highest Property Taxes?
According to SmartAsset.com, Connecticut, New York, and Illinois have the highest property tax rates in the nation when calculated as a percentage of the home’s value. Real estate taxes averaged 3% of home values in all three states.11
The Bottom Line
Property tax is defined by the Tax Foundation as the tax that is imposed on immovable property like land and buildings, as well as on movable property, like vehicles and equipment.
Property tax is the single largest source of state and local revenue in the U.S. The capital is used to fund schools, roads, police, and other services.6 Property tax rates vary greatly among states and localities.