Real estate taxes are one of the hidden costs of becoming a real estate or property investor. Understanding how to pay real estate taxes, find deductions for both investing in houses and land investment, and working well with your accountant can help you, as a physician, avoid losing money in the long run as a real estate investor.
In this article, we will discuss real estate tax basics, why real estate taxes exist, other real estate basics, ways you can find deductions, and what states you might want to avoid as a physician property investor.
Real Estate Tax Basics You Need to Understand as a Physician Investor
Real estate taxes are a levy imposed by the government on the ownership of real property. The tax is assessed by local governments, which then pass it on to you as part of your annual property bill. While this may seem like an obvious definition, there are some nuances that are worth understanding as you prepare for your next real estate purchase or sale.
The amount you pay each year depends on your home's value or property value and the tax rate set by your state, county, and city. The amount of real estate property taxes you pay is calculated by multiplying the assessed value of your property by the applicable tax rate or MILL rate. A mill equals $1.00 of tax for each $1,000 assessment. To calculate the property tax, multiply the property assessment by the mill rate and divide by 1,000.
If your home has an assessed value of $500,000 and you live in a county or town where the MILL rate is 1.290%, your annual taxes will be $6,450.
For a look at a MILL rate calculator, check out this link.
How Much Real Estate Tax Will You Pay as a Property Investor?
Real estate taxes are a large part of the cost of owning a home.
Many wonder: Are real estate tax and property tax the same? Yes! Real estate taxes are specific to your property and depend on several factors:
The worth of the home or property
The location of the home or property
Property taxes are often based on market value but may also include assessments such as square footage or number of bedrooms in addition to any unique features (like an ocean view).
As such, it's important not only for physicians who own investment properties but also for those who own homes where they live full-time to keep track of these figures so they can ensure they're paying an appropriate amount.
Are There Any Tax Breaks On Real Estate For Physicians?
There are a number of tax benefits for real estate investors. These can be claimed by an individual who invests in real estate as a business rather than simply owning a home or investment property for personal use. If you're considering becoming an investor, here are some things to keep in mind:
The interest paid on loans used to purchase investment properties is deductible as long as it's not used for personal expenses (like vacations).
Depreciation allows investors with depreciable assets--like buildings and land--to write off part of the cost over time through deductions against income tax liability. This helps reduce how much money you'll owe the government each year on your returns!
Investors can also deduct any costs they incur in order to make their property more valuable. This might include improvements like adding new paint or carpet, repairs and maintenance, advertising expenses, and legal fees related to acquiring the property. There are limits on how much can be deducted each year, though, so be sure to consult an accountant before filing your return.
In addition, if you are a physician who owns your own medical practice building or complex as an investment property, you can claim up to 20% of the rental income as a legal real estate tax deduction in some states under QBID or Qualified Business Income Deduction.
Knowing Your Options For Real Estate Tax Deductions
Physicians need an understanding of whether they qualify for any special exemptions when filing their taxes each year.
Here are a few other tax exemptions physicians might qualify for in 2023 and beyond:
Investment property depreciation.
Tax-loss Harvesting - this is ideal for physicians who have losing investments where they might sell the investment that is losing money and purchase another
of lesser or comparable value to maintain their portfolio. Physicians can use the first $3,000 of an investment loss to offset income or capital gains on their taxes.
One of the biggest mistakes that physicians make when they're filing their taxes is not understanding what type of income they receive and how it's taxed.
In a perfect world, you would be paid by your employer in such a way that all of your earnings were considered wages, and none were considered self-employment income. However, this is often not the case for physicians--especially those who own their own practice and are responsible for paying themselves out of its profits.
Which State Has the Highest Real Estate Tax?
As a physician investor, you may be wondering which state has the highest real estate taxes. While it's true that property taxes vary widely across states and cities, there are some general trends to consider when deciding where to invest in real estate.
Here are the top ten states with the highest annual property tax rates:
If you are considering either opening a practice in one of these states and purchasing a property to operate your practice out of or simply investing in real estate in one of these states, the high tax rate is something you should carefully consider.
Some viable options for states with the lowest property tax rates include:
As a physician investor, it's important to know where the money from your investments goes, whether that be to taxes, maintenance, or profits. Making wise choices, investing in states with low property tax rates, and working with an experienced accountant who specializes in investments and understands the tax breaks you, as a physician, can qualify for is key.
If you have any questions about your taxes or how much they might be, contact an accountant or financial planner who specializes in this area.
David Price MD is the Founder and CEO of getFREED, a business providing real estate education and vetting of individual deals to help physicians and other healthcare professionals build a passive stream of income, allowing them to work less and practice on their terms.
David lives with his wife and two daughters in Atlanta, GA, USA.
To find out more about David and getFREED, head to http://www.get-freed.com.