Owning real estate is one of the most effective forms of investment throughout the world. As the price of real estate is going through significant growth, the demand for real estate is also increasing.
But with all its perks, there are some complexities that real estate brings to the table. And tax is a big one of them. So without any further ado, let us check out what it actually is.
What is Real Estate Tax?
If any legal entity, whether it is an individual or a company owns real estate, they are subjected to a tax to the government. The amount of tax to be paid is determined by the local government where the property is located. And the amount of tax is also dependent on the value of the property, including the value of the land it is on.
Accounting for Real Estate Tax
The real estate tax is one of the trickiest to account for. But there are two popular methods for real estate tax accounting used for effectiveness. They are:
- Cash accounting method
- Accrual accounting method
Enterprises select the accounting method that best suits their industry and results in significant tax benefits. The main difference between these methods is the way all form of expenses and incomes is reported on the tax return.
For instance, in the cash accounting method, when you receive a payment, that income becomes taxable. similarly, the expense is only deductible when you pay it. Receiving an invoice does not account for a deduction.
On the other hand, in the accrual method, any form of earned revenue is recognized as income, regardless of the time of payment. Similarly, whenever an invoice is received, it will be recognized as an expense.
Real Estate Tax vs Business Tax
The real estate taxes and accounting differ from standard business taxes and accounting due to the overall process and the different rates of taxes.
In the case of business tax, there are five major subcategories. They are:
- Gross-receipts tax.
- Excise tax.
- Corporate franchise tax.
- Value-added tax (VAT).
- Employment withholding tax.
Various industries have to pay some additional form of taxes due to their business structure.
On the other hand, real estate tax solely depends on the fair market value of the property and the predetermined percentage in your municipality. The amount to be paid also depends on your local tax rate.
Other things to keep in mind for real estate tax accounting are:
- Assessed value,
- Transitional assessed value
- Exemptions, when applicable.
Personal property on the other hand is taxed at a lower rate than real estate tax. Due to these differences, the accounting for both cases is completely different. Many tax agency focuses on a specific tax accounting and helps clients file their taxes for the best possible outcome. Have questions about real estate taxes? Contact ProVision today.
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