What Is Double Taxation in Real Estate?
What is double taxation? It’s the practice of taxing the same revenue twice—once at the corporation level and again at the personal level.
For real estate investors, this might have huge financial ramifications. So it’s critical to comprehend how it operates and how to avoid it.
We’ll cover all you need to know about double taxation in real estate in this post, along with advice on how to prevent it. Let’s start now!
What Is Double Taxation?
The practice of taxing the same revenue twice is known as double taxation. When income is subject to both corporate and individual taxes, this occurs.
The corporate level refers to the taxation of income at the corporate level. Whereas the individual level refers to the taxation of income at the personal level. As a result, the income is taxed twice.
How Does Double Taxation Apply to Real Estate?
A real estate investor must own a property through a corporation. The corporation pays taxes on the rental revenue from the asset at the corporate tax rate. The rental revenue is then taxed again at the individual tax rate when it is delivered to the individual owner as a dividend.
Selling a home is where real estate investors could be subject to double taxes. The investor in this situation is liable for capital gains tax on the sale’s profit. If the investor owns the property through a corporation, the corporation must pay corporate tax on the proceeds of the sale.
How Can You Avoid Double Taxation?
In real estate, there are numerous strategies to avoid double taxation. One option is to personally own the property rather than through a business. The rental income in this instance is not subject to company tax. It is instead taxed at the individual tax rate.
Creating a limited liability company (LLC) is another technique to avoid paying taxes twice. A hybrid business form called an LLC combines the advantages of corporations and partnerships.
An LLC is not required to pay corporate tax on rental income. Instead, the money is transferred to the private owners and is subject to their personal tax rates.
There are still choices available even if you are already subject to double taxation in real estate. Selecting S corporation status is one option.
An S corporation prevents double taxation. It allows income to be transferred to individual shareholders. Try to search for a website that offers a plethora of information on the subject to learn more about property tax.
Take Action to Avoid Double Taxation
Double taxation is a complicated problem for real estate investors. It can have a big influence on their financial situation.
Investors can reduce their tax liability and prevent double taxation. To succeed in this field, take the time to comprehend what is double taxation. Also, look into your alternatives if you’re considering investing in real estate.