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Property Tax and Tax-Free Exchange

Property Taxes and How to Reduce Them

Real estate tax is an amount that the owner of a property is required to pay the government. In the U.S., it is the municipal or county authority that imposes taxes. Real estate taxes are collected by the county treasurer. The office of the county treasurer is typically a constitutional office with a term of four years. Taxes collected are allocated to various public budgets approved by the government.

The rate of tax varies across jurisdictions. However, the rate is generally in the range of 0.2% to 4% of the property value. Before purchasing property, it is important to understand the fair market value of the property because taxes are assessed based on that value. In order to understand the fair market value of a property, you can seek the help of a property appraiser because an appraiser will be experienced in estimating the value of a property and will have knowledge of any event likely to affect the price of the property.

For assessment of property value, two things are taken into consideration:

  • the value of the site/land, and
  • the value of the building or any improvement.

It is most likely that you have depended on a lender to fund your property purchase. A part of your monthly installment goes towards repaying the debt and another part actually goes as interest on money borrowed. The good thing of having borrowed is that you will be entitled to tax deductions on the interest payment. During the process of initial settlement, your lender can require that you deposit an amount towards property tax into an escrow account.

Tax-Free and Tax -Deferred Exchanges

When you sell a property, you often make a profit out of the sale. Such profit is also taxable. Law actually permits you to defer payment of such tax if you are re-investing the proceeds of the sale in another similar property. Such an exchange is a tax-deferred exchange, and not a tax free exchange as understood by many. It is also a fact that you don't have to sell an asset in order to make profit.

Capital Gains Tax

Sometimes, by just holding on to an asset for certain periods of time, you can profit by quite a big amount. These profits are called capital gains and are taxable. In order to properly assess your profits or capital gains, you should have a fair understanding of the cost basis, also called basis or tax basis. Cost basis is your initial investment in a property, that includes the purchase price as well as any other amount you would have paid to own the property (like brokerage). Cost basis is actually what determines how much profit or loss you make while selling a property. Records related to real property are stored in the respective county assessor's office. Details like past owners of the property and tax records are often made available online.


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