Understanding Real Estate Tax Law
Real estate taxes vary greatly based on location -- whether you're an investor, homeowner, or renter, you can expect to pay different fees and taxes. So, if you're in Bucks, Delaware, Montgomery, or Philadelphia County, it pays to have a real estate tax lawyer or qualified accountant with local expertise to decipher the differences.
Depending on your situation, you'll need to consider four real estate taxes:
- Capital Gains Tax
- County Property Tax
- Transfer Tax
- Net Investment Income Tax
A local county or community assessor assesses your property value and determines the taxes applied. Different counties within a state use different tax rates based on various factors. In addition, the state may levy property.
Capital Gains Tax
If the proceeds of your property sale exceed its costs, you may be subject to a capital gains tax. Your taxes reflect the sum of these items:
- The price you paid for the property.
- For example, the property costs include application, appraisal, and home inspection fees.
- The cost of significant improvements like roof replacement, room additions, heating upgrades, and more.
The time you've held property also helps determine your tax calculation for real estate investments. For example, long-term investments typically receive more favorable treatment. Depending on income levels, tax rates may range from zero to 20%. A real estate tax lawyer can help manage your investments.
However, short-term capital gains are taxed as ordinary income. In that case, federal tax rates may range from 10% to 37%, depending on your income. In addition, if you incur a capital loss, you may be able to offset those losses against other income.
Property use also impacts your taxation when selling a property. For example, business properties require tax payments for depreciation. On the other hand, a primary residence where you've lived for at least two of the past five years may qualify you for exclusion on profit up to $250,000 if you're single and $500,000 if you're married.
Talk to your accountant or a real estate tax lawyer near you to help determine your tax owed.
County Property Tax
Your local government collects real estate taxes for community projects and services such as emergency services, schools, and roads. Those taxes reflect the assessed value of your land and its buildings.
Local authorities determine property taxes, leading to varying costs based on your location. A property appraiser assesses your property to determine the appropriate property tax.
If you're dissatisfied with that assessment, you can challenge it. Estimates show, for instance, that 30-60% of properties in the United States are over-assessed. Talk to your county assessor or local real estate tax lawyer for details on challenging your assessment.
Transfer Tax
Pennsylvania imposes a one-percent realty transfer tax based on the real estate value. In addition, the county where the property resides applies a tax. For example, Montgomery County's transfer tax is one percent. On the other hand, Philadelphia imposes a 3.278% transfer tax on the value of real estate transferred, one of the highest in the state. You can read more about the real estate transfer tax in Philadelphia here.
Both the grantor and the grantee are jointly and severally liable for tax payments. The county recorder of deeds collects and remits the Commonwealth's one percent to the Department of Revenue.
Some real estate transfers are exempt from the tax. For example, transfers among family members may be held exempt. It's essential to check with your real estate agent or tax lawyer to determine your property transfer tax.
Net Investment Income Tax
Concerning real estate, Net Investment Income Tax (NIIT) applies to rental income and capital gains from rental property sales. It uses a 3.8% rate for certain investment income, such as rental income and capital gains from passive investment for a taxpayer. Profits from investment real estate sales also qualify.
NIIT applies to the lesser of your net investment income or the amount your modified adjusted income (MAGI) surpasses filing thresholds established by the IRS.
NIIT impacts only high-income taxpayers, for example, single-filing individuals with more than $200,000 and joint filers with more than $250,000 of income. It's applied to estates and trusts, as well as individuals. Here's a closer look at the exact thresholds based on your filing status:
- Single: $200,000
- Married filing jointly: $250,000
- Married filing separately: $125,000
- Head of household with a qualifying person: $200,000
- Qualifying widow(er) with dependent child: $250,000
Proper investment management is essential. An investment planner or real estate tax lawyer can help you with that effort.
How Our Real Estate Tax Lawyers Can Help
Our attorneys have extensive real estate tax law experience in Bucks, Delaware, Montgomery, and Philadelphia County. They also support clients throughout southeastern PA and even New Jersey.
Our lawyers and attorneys have appealed tax assessments for properties of all types, including affordable rental housing, utility and condominium properties, and tax exemptions for properties owned by non-profit entities.
In addition, our real estate tax lawyers have negotiated payment instead of tax ("PILOT") agreements and real estate tax abatements for new construction under Pennsylvania's Local Economic Revitalization Tax Act ("LERTA") throughout the Commonwealth. They've also negotiated tax increment financing agreements with local taxing officials.
Our real estate attorneys understand the complexities of Pennsylvania and Philadelphia's real estate transfer tax statutes and regulations. Call our law firm if you're confused by tax laws or facing a legal issue. We have offices in Doylestown and Norristown, PA.
We can also help you with other real estate issues like construction law, real estate litigation, and land use and zoning.
