Real property tax is one form of taxation that can be confusing to property owners, landlords, and renters. Put simply, real property tax is a tax imposed on all types of real properties including condominiums, houses, buildings, and other non-movable properties like barns and garages.
How to compute real property tax? When does one pay? These are just two common questions that plague many landlords. Unless you’re living in Alaska, where real property tax is not imposed, owning and renting out real property comes with taxation duties. While real property tax may sound confusing and intimidating, it’s actually easy to grasp. Here are 8 things landlords need to understand about real property tax.
- The importance of real property tax
For many local and central governments, real property tax is a major source of revenue. It is used to pay for social services like education, health, infrastructure like roads, and operating expenses of government offices. Paying real property tax is considered a civic duty. In fact, many countries consider it a legal obligation. Failing to pay real property tax will cause you to face penalties, such as paying fines or going to jail. Note that some countries and states do not impose real property tax. Monaco, Dubai, Israel, and Croatia are just some countries with no real property tax.
- Real property tax is different from personal property tax
Many landlords confuse real property tax with personal property taxes. The problem lies with both common usage and the nature of “property taxes.” Used generally, property taxes encompass real estate and personal property. However, for many governments, there is a clear distinction between real and personal property. As mentioned earlier, real property tax is applied to non-movable properties such as a house and the land it is built on. In contrast, personal property tax is imposed on movable properties such as vehicles, furniture, and livestock.
- Who determines real property tax?
Real property tax is calculated based on a property’s value. The government performs an assessment of a property’s value. While real property tax is collected in most countries, its computation and application differs in various territories. For example, in the UK, real property tax combines elements of basic property tax and poll tax. In the US and the Philippines, the practice is similar in that a public official or tax assessor determines property value for the purpose of quantifying the appropriate tax rate.
- Make sure if Value Added Tax (VAT) applies to your real estate transaction
Knowing whether VAT is required to your real estate transaction is important in understanding real property tax. In some cases, VAT is required on top of real property tax. A form of sales tax, VAT is usually levied on the sale or lease of real property. It is an indirect tax, which means that its payment may be passed on to the buyer, renter or lessor of a real property. Like all taxes, VAT differs in each country. For example, Italy has a 22% VAT while the Philippines has 12%. In the Philippines, there are VAT exemptions. It all depends on the amount of rent. For example, if your property lease is less than Php10, 000, then you are not required to pay VAT. The US doesn’t have VAT at the moment, although there are discussions about adopting VAT to spur economic growth.
- Learn the basic computation of RPT
Paying the right amount of real property tax is integral to landlord right sand responsibilities. Even with a tax assessor, it will be helpful if you know how to compute your RPT. The formula is fairly simple. To compute for the RPT, just multiply RPT rate to the assessed value of your property, thus:
RPT = RPT Rate x Assessed Value
The RPT rate varies per city. For example, cities within Metro Manila have an RPT rate of 2 percent, while provinces have only 1 percent. To get the assessed value, multiply fair market value to assessment level, thus:
Assessed Value = Fair Market Value x Assessment Level
The Fair Market Value is based on the assessment of a tax assessor as written in the tax declaration. You can get the assessment level from the tax ordinance of the city or municipality where your property is located.
6. Pay your RPT early
Paying your real property tax early will save you from a lot of hassle. By early, it means before the fiscal year ends. Some local governments give incentives to early payors in the form of tax discounts. You can enjoy as much as 20% RPT discount. In other municipalities, they also give discounts if you pay next year’s RPT in full. Since the tax discount per city and municipality varies, check with your local government office to be sure about the dates and amount of discount.
7. Warning on late payments
Late payment of Real Property Tax is sometimes unavoidable. Whether its financial constraint or other reasons, failure to pay RPT on time will result in penalties. You can incur a surcharge of 2% for each month of unpaid RPT. It can go as high as 72% but not exceeding 36 months. Late and non-payment of RPT can also prompt the government to tag your property as tax delinquent. In the worst case, the local government for public auction may subject your property. Some properties, however, are exempted from RPT. These include charitable institutions, cooperatives, and lands used for religious and educational purposes.
- Explore further tax deductions
Who doesn’t like more tax deductions? Whether you’re an owner-occupant or landlord of the real property, you’re entitled to a number of tax deductions apart from the one you can get for paying your RPT early. These deductions include insurance premiums, loan interest on mortgage payments, credit card interests, and depreciation of asset, repairs, and maintenance cost. Remember that before taking advantage of these deductions, be sure you have documentation to back them up. Failing to provide proper documentation will cause you to pay the actual amount due, with interest.
It is often said that, apart from death, the only thing certain in life is taxes. Since real property tax is inevitable, understanding the 8 points in this guide for landlords will help you save time, energy, and resources.
Author Bio: Kimberly Grimms is a futurist who spends most of her time monitoring social behavior in search for new consumer trends. She uses the information to create viral and useful content as part of the new media strategy. She’s interested with technology, market behavior, new media, environment, sustainability, futuristic scenarios and businesses.