4 Real Estate Taxes You Need to Factor into Your Investments
Real estate taxes or property taxes are annual taxes applied to the value of a property as assessed by a local county or community assessor. Different counties within a state may have wildly different tax rates depending on a variety of factors. The state may also levy a property tax in addition to the county and other local agencies where the property is located. These taxes go to fund schools and libraries as well as county upkeep and improvements. The assessed value includes the price of the land as well as improvements such as buildings or swimming pools.
Capital Gains Tax
Transfer Tax
County Property Taxes
Net Investment Income Tax
An important concept to understand is how to calculate cost basis. You can arrive at the cost basis for taxes by taking the original purchase price and adding any qualified improvements. You may also reduce your basis in some cases — if you claimed depreciation deductions, for example. Qualified improvements can add value, prolong property life, and give a new or different use (such as with a swimming pool). The costs of routine maintenance and minor repairs are not qualified improvements.
Inherited property receives a tax-free step-up in basis to the fair market value and is a useful way to pass savings on to heirs as part of an estate plan. Real estate property that is converted from personal to business use or vice versa may face special tax considerations. Speak with a qualified tax professional to ensure your personal tax situation receives the required attention and care to prevent any unwanted tax bills. The value of all property within a specified area is taxed in order to produce revenue for local and state governments. Generally, states have local tax authorities assess the property in their jurisdiction and determine their values as well as the property tax rates to apply to real estate. Different states have vastly different rules when it comes to property taxes.
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How Tax Reform Impacts Real Estate Investors
Tax law changes can significantly influence the cost and profitability of owning real estate. Explore the major tax advantages, deduction limits, and planning strategies that every investor should know.
Tax Advantages for Real Estate Investors
Recent tax reforms introduced valuable benefits for many real estate investors, including:
- Lower tax rates for many taxpayers
- Pass-through business deductions
- Section 1031 like-kind exchanges retained for real estate
- Bonus depreciation available for qualifying assets
Deduction Limits & Tax Changes
While the reform created new opportunities, it also introduced some limitations:
- State and Local Tax (SALT) deductions capped at $10,000
- Mortgage interest deductions reduced
- Larger standard deduction may reduce the benefit of itemizing, especially for homeowners in high-tax states
Estate Tax & Real Estate Expenses
The tax reform also affected long-term planning:
- Estate tax exemption increased to over $11 million, allowing many families to transfer assets without federal estate tax
- Real estate ownership involves more than the purchase price—investors should also consider ongoing property taxes and other ownership costs before investing
1. Capital Gains Tax
When you sell an asset for more than what you originally paid, the profit is considered a capital gain and may be subject to taxation. For real estate and other investments, the length of time you have owned the asset plays an important role in determining how those gains are taxed. Long-term investments are generally treated more favorably, with tax rates ranging from 0% to 20% depending on income level, while short-term gains are typically taxed as ordinary income. If an investment is sold at a loss, those losses may be used to offset certain gains or other income.
Real estate sales can involve additional tax considerations depending on how the property was used. A primary residence may qualify for an exclusion of up to $250,000 for single taxpayers or $500,000 for married couples filing jointly if ownership and residency requirements are met. Investment properties may require depreciation recapture, while strategies such as a Section 1031 exchange can allow investors to defer capital gains taxes by reinvesting proceeds into another qualifying property. Understanding these rules can help property owners make informed decisions when planning a sale, retirement strategy, or estate transition.
Capital Gains Tax
Key Capital Gains Tax Considerations
Short-Term vs. Long-Term Gains
The length of time you own an investment affects how your profit is taxed. Long-term gains typically receive lower tax rates than short-term gains.
Capital Gains Tax Rates
Tax rates depend on your income level and the type of gain. Long-term gains may qualify for rates of 0%, 15%, or 20%, while short-term gains are taxed as ordinary income.
Primary Residence Exclusion
Qualifying homeowners may exclude up to $250,000 of profit if single or $500,000 if married filing jointly. Certain ownership and residency requirements must be met.
Investment Property Taxes
Selling business or rental property may involve additional taxes, including depreciation recapture. Property use can affect your overall tax liability.
Section 1031 Exchange
A 1031 exchange allows investors to defer capital gains taxes by reinvesting proceeds into another qualifying property. This strategy can help preserve investment growth.
State Tax Considerations
State rules can impact how much tax you owe after a property sale. Some states tax capital gains, while others have no state income tax.
2. County Property Taxes
County taxes are property or real estate taxes which are determined by local tax assessors where the property is located. A tax assessor from the assessor’s office will gather information from local, city, and county agencies — as well as registrars and county clerks — to determine property value. Generally, an auditor will determine the appropriate property and real estate tax rate and will also allocate raised money to county agencies, cities, schools, and special districts. The treasury will usually send property owners their real estate tax bills by October each year. Due dates for property taxes vary by state. For example, in Texas, property taxes are usually due by January 31st. California, on the other hand, wants an initial installment by November 1st and the second installment by February 1st. The first installment isn’t late until December 10th, and the second installment is late April 10th.
Local tax authorities have the ability to set the property taxes in their jurisdictions. This leads to many different property taxes applying to any given property depending on its specific location. A property appraiser will assess a property and determine the appropriate property tax. You can also challenge the property value if you deem it to be incorrect (reach out to your county assessor for more information).
It can be a complicated process to determine the exact amount of tax you can expect to owe on a property. These tax rates change every year. Some property tax rates are even advertised in local newspapers. Texas, for example, publishes this information each October. You can also reach out to your state tax agency, local real estate agents, or a knowledgeable tax attorney for more information about the property tax for a given piece of real estate.
County Property Taxes
County Property Taxes
You can pay your real estate tax through a variety of methods depending on your local policies. Your county treasurer may accept a debit card, money order, or check, and you may be able to pay by phone for a convenience fee. You can also mail payments to your county treasurer’s physical address. Personal property tax and real estate tax can result in hefty fines and penalties if delinquent. Some counties allow installment payments or other tax relief within a given tax year.
California Property Taxes
California has 58 counties and a property tax system shaped by Proposition 13, which limits the general property tax levy to 1% of a property’s assessed value. In addition to the base tax, homeowners may pay voter-approved debt assessments and special district taxes that help fund schools, infrastructure, and other local services.
One of Proposition 13’s key benefits is limiting annual increases in assessed property value to 2%, helping long-term homeowners maintain more predictable property tax bills. However, when a property is sold or transferred, it may be reassessed based on the purchase price, which can result in a supplemental property tax bill.
CALIFORNIA PROPERTY TAX HIGHLIGHTS
1% General Property Tax Levy Under Proposition 13
2% Annual Cap on Assessed Value Increases
Additional Taxes for Voter-Approved Debt & Special Districts
Property Reassessment After a Sale or Transfer
WHY NEIGHBORS MAY PAY DIFFERENT PROPERTY TAXES
Property Taxes Are Based on Assessed Value, Not Current Market Value
Long-Term Owners Often Benefit from Lower Taxable Values
Recent Buyers Are Typically Assessed Closer to Market Price
The Same Neighborhood Can Have Very Different Tax Bills
PRO TIP:
BUYING A HOME CAN TRIGGER A NEW TAX ASSESSMENT
When real estate changes ownership, the county assessor may reassess the property’s taxable value based on the purchase price. This can result in a supplemental tax bill and higher annual property taxes than those paid by the previous owner.
IMPORTANT NOTE:
PURCHASE DATE CAN HAVE A BIG IMPACT ON PROPERTY TAXES
Two similar homes on the same street may have significantly different property tax bills because Proposition 13 limits annual assessment increases. A homeowner who purchased years ago may pay substantially less than a neighbor who recently bought a comparable home at today’s market value.
Los Angeles County Property Taxes
Los Angeles County is the largest county in California, with more than 10 million residents across 88 cities. While every property is subject to California’s 1% general property tax levy, the total tax bill is influenced by additional local assessments, including voter-approved debt and special district taxes.
Depending on where a property is located, taxes may also support services provided by cities, water districts, school districts, community colleges, and other local agencies. These combined assessments determine the property’s effective tax rate.
LOS ANGELES COUNTY PROPERTY TAX HIGHLIGHTS
1% California General Property Tax Levy
Additional Voter-Approved Debt Assessments
Special District Taxes for Local Services
Combined Tax Rates Vary by Property Location
WHAT MAKES UP YOUR PROPERTY TAX BILL?
City & Local Government Assessments
School & Community College District Taxes
Water & Other Special District Charges
Direct Property Assessments May Apply
PRO TIP:
YOUR LOCATION CAN SIGNIFICANTLY AFFECT YOUR TAX BILL
Two properties with similar values may owe different amounts in property taxes depending on the city, school district, water district, and other taxing agencies that apply to their location.
IMPORTANT NOTE:
DON’T OVERLOOK ADDITIONAL ASSESSMENTS
A property with a taxable value of $263,651 and a combined tax rate of approximately 1.136323% would owe about $2,995.93 in annual property taxes. However, direct assessments for local improvements or services can add hundreds of dollars more to the final annual tax bill.
Other California Counties
California property taxes vary widely by county because rates depend on local assessments, voter-approved debt, and special district charges. Counties such as San Diego, Orange, Riverside, and Sacramento may have different tax structures based on the services and districts connected to each property.
Beyond annual property taxes, buyers and sellers must also consider tax responsibilities during a real estate transfer, including prorated taxes and potential reassessments after a sale.
CALIFORNIA COUNTY PROPERTY TAXES DEPEND ON:
County & Local Tax Assessments
Voter-Approved Debt Obligations
Special District Services
Property Transfer Tax Considerations
PROPERTY OWNERS SHOULD ALSO REMEMBER:
Mortgage Payments May Include Property Tax Escrows
Annual Tax Bills Are Typically Paid in Installments
Late Payments Can Result in Penalties and Fees
Tax Relief or Payment Plans May Be Available
PRO TIP:
PROPERTY TAX RESPONSIBILITY CHANGES AFTER A SALE
When a property is transferred, the seller is generally responsible for property taxes up to the transfer date, while the buyer becomes responsible afterward. Since procedures can vary by county, reviewing tax obligations before closing can help prevent unexpected costs.
IMPORTANT NOTE:
COUNTY RULES AND DEADLINES MATTER
Property tax deadlines, penalties, and payment options differ across California counties. If taxes become difficult to manage, contacting the county tax office or a qualified tax professional can help identify available solutions and avoid potential tax liens
Texas Property Taxes
Texas has 254 counties, more than any other U.S. state, and does not impose a state income tax for most taxpayers or a statewide property tax. Instead, property taxes are determined locally by counties, cities, school districts, transit authorities, and special purpose districts.
Because multiple local entities can levy taxes on the same property, effective property tax rates often range between 1.8% and 2.4%, depending on the property’s location and applicable local assessments.
TEXAS PROPERTY TAXES ARE DETERMINED BY:
County Property Tax Assessments
City & Local Government Tax Rates
School District & Transit Authority Taxes
Special Purpose District Assessments
TEXAS PROPERTY TAX TIMELINE
January – Property values are appraised.
May – Appraisal notices are mailed, allowing owners to protest or appeal valuations.
September–October – Local tax rates are adopted, and tax bills are issued.
January 31 – Annual property tax payment deadline.
PRO TIP:
TEXAS HAS NO STATE PROPERTY TAX
Unlike California’s statewide 1% property tax levy, Texas relies entirely on local taxing authorities. This means two properties with similar values can have very different tax bills depending on the county, city, school district, and other local jurisdictions.
IMPORTANT NOTE:
REVIEW YOUR PROPERTY APPRAISAL CAREFULLY
Property owners have the opportunity to challenge an appraisal if they believe it is inaccurate. Reviewing your appraisal notice and filing an appeal when appropriate may help reduce your annual property tax obligation before taxes become due.
Harris County Property Taxes
Harris County is the largest county in Texas, with 34 cities and a population of more than 4.6 million. Property taxes are determined by a combination of local taxing authorities, with more than 70 taxing entities potentially contributing to a property’s total tax bill.
Each year, properties are appraised based on their market value as of January 1, and local governments establish tax rates to fund public services and meet annual budget requirements.
HARRIS COUNTY PROPERTY TAXES ARE BASED ON:
Market Value as of January 1
County, City, and Local Taxing Authorities
More Than 70 Potential Taxing Entities
Annual Budget-Driven Tax Rates
WHO DETERMINES YOUR PROPERTY TAX?
The County Appraises the Property’s Value
Local Taxing Units Set Individual Tax Rates
Many Taxing Authorities Work with the County Tax Assessor-Collector
The Combined Rates Determine Your Total Tax Bill
PRO TIP:
YOUR PROPERTY’S APPRAISED VALUE MATTERS
Property taxes in Harris County begin with the property’s market value on January 1. Since local tax rates are applied to this appraised value, reviewing your annual valuation and understanding how it was determined can help you identify opportunities to challenge an inaccurate assessment.
IMPORTANT NOTE:
MULTIPLE TAXING ENTITIES CAN AFFECT YOUR FINAL BILL
Unlike states with a single statewide property tax, Harris County property taxes are the combined result of numerous local jurisdictions. Understanding which taxing entities apply to your property can provide greater clarity on how your annual property tax bill is calculated.
Dallas County Property Taxes
Dallas County is the second-largest county in Texas, with more than 2.5 million residents across 31 cities. Property taxes are determined by a combination of county, city, school district, and special district tax rates, resulting in varying tax obligations depending on a property’s location.
The county includes 10 special districts, and school districts are among the largest contributors to property tax bills. As a result, the average effective property tax rate in Dallas County generally ranges from 2.17% to 2.72%.
DALLAS COUNTY PROPERTY TAX HIGHLIGHTS
Average Property Tax Rates Between 2.17% and 2.72%
31 Cities with Different Local Tax Rates
10 Special Districts May Contribute to Property Taxes
School District Taxes Are a Major Portion of the Tax Bill
WHAT AFFECTS YOUR DALLAS COUNTY TAX BILL?
County & City Property Tax Rates
Independent School District Assessments
Special District Taxes for Local Services
Property Location Within the County
PRO TIP:
SCHOOL DISTRICTS CAN HAVE A BIG IMPACT ON YOUR TAXES
School district tax rates vary throughout Dallas County, meaning two similar homes in different school districts may have noticeably different annual property tax bills.
IMPORTANT NOTE:
COMPARE LOCAL TAX RATES BEFORE BUYING
The total property tax you pay depends on the combination of taxing entities serving your property. For example, the Dallas Independent School District and the Carrollton-Farmers Branch School District have different tax rates, which can directly affect the overall cost of owning real estate in Dallas County.
Other Texas Counties Property Taxes
Texas property taxes vary significantly by county because each property is affected by the specific combination of county, city, school district, and special taxing units that apply to its location. Counties such as Tarrant, Bexar, and Travis have different tax rates based on local services, annual budgets, and property values.
In addition to annual property taxes, buyers and sellers should understand how tax responsibilities are handled during a real estate transaction. While payment responsibilities can be negotiated, local customs often determine how taxes are prorated between parties.
TEXAS COUNTY PROPERTY TAX HIGHLIGHTS
Local Tax Units Determine Final Tax Rates
Property Values Are Assessed Annually
Homestead Values Generally Limited to 10% Annual Increases
Buyer & Seller Tax Responsibilities May Be Negotiated
TEXAS PROPERTY TAX FACTORS TO CONSIDER:
Tarrant County Rates Range Around 2.321%–2.37%
Travis County Rates Range Around 1.97%–1.98%
Bexar County Rates Vary Based on Local Tax Units
Homestead Appraisals Generally Cannot Increase More Than 10% Annually
PRO TIP:
YOUR COUNTY AND TAXING DISTRICTS MATTER
A property’s tax bill depends on the specific taxing entities connected to the property. Even nearby homes may have different tax rates based on city boundaries, school districts, and special districts.
IMPORTANT NOTE:
COMMERCIAL & RENTAL PROPERTY SALES MAY HAVE TAX CONSEQUENCES
When selling commercial real estate or rental property, depreciation deductions can create additional tax considerations. Depreciation recapture may apply and is generally treated as ordinary income rather than long-term capital gains, making professional tax planning important before completing a sale.
3. Transfer Tax
A transfer tax, such as the California Documentary Transfer Tax, is based on property value and charged when property ownership changes. There are exemptions to the transfer tax in California, such as transfers due to death, gift, divorce, separation, foreclosure, or changes in holding method, to name a few.
Otherwise, counties can impose a transfer tax rate up to $0.55 per $500 of property or $1.10 per $1,000 of property. In addition to county transfer tax, cities can also impose documentary transfer taxes which can become quite expensive. Be sure to check with a real estate agent or tax attorney to project your transfer and other taxes.
Some counties, such as San Francisco County, do not charge a transfer tax. There is no residential real estate transfer tax in Texas. This helps to lower the impact of higher property taxes and real estate that is rapidly growing in value and cost. Along with no income tax, the lack of transfer tax means the major tax considerations are county or property taxes.
4. Net Investment Income Tax
The net investment income tax (NIIT) applies to rental income and capital gains from the sale of rental properties.
This tax applies a 3.8% rate to certain investment income, such as rental income and capital gains from a passive investment for a taxpayer. An example might be rental properties that are not actively managed by an owner who is a real estate agent.
Gains from the sale of investment real estate, such as a second home, would also qualify. The net investment income tax applies to those with an income over $200,000 for single filers and $250,000 for married joint filers.
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SOLUTIONOVERVIEW
Deductions, Exemptions, and Credits
01
Home Sale
Exclusion
Eligible homeowners may exclude up to $250,000 (single) or $500,000 (married filing jointly) in profit from the sale of a primary residence, provided IRS ownership and residency requirements are met.
02
Property
Tax Deductions
Homeowners may deduct state and local real estate taxes, although the federal SALT deduction is currently limited to $10,000 under the Tax Cuts and Jobs Act.
03
Mortgage Interest
Benefits
Mortgage interest is deductible on up to $750,000 of qualified mortgage debt. Interest on home equity loans is generally deductible only when the funds are used for eligible home improvements.
04
Standard
Deduction Changes
The increased standard deduction means fewer taxpayers itemize deductions, reducing the overall tax advantages of homeownership for many individuals.
05
Investment Property
Tax Benefits
Real estate investors may benefit from Section 1031 like-kind exchanges, which allow qualifying investment properties to defer capital gains taxes. Rental property owners may also qualify for the 20% Qualified Business Income (QBI) deduction, subject to IRS eligibility rules.
06
Homestead &
Other Exemptions
Some states, including Texas, offer homestead exemptions that reduce taxable property value for qualifying homeowners. Additional exemptions may be available based on age, disability, veteran status, surviving spouse status, or other eligibility requirements.
Tax laws change frequently, and eligibility varies based on individual circumstances. Consult a qualified tax attorney or tax professional for guidance tailored to your specific situation.
REALESTATE
Understanding Real Estate Taxes
Taxes can be complicated and confusing, especially when considering real estate transactions. There are many different factors involved and taxes to consider.
If you are selling real estate, you may want to consider how long you’ve held the property.
01
Buying & Owning Real Estate
When purchasing real estate, it is important to understand the different tax responsibilities that come with ownership.
Property owners may need to consider property taxes, potential deductions, and future tax implications before making investment decisions.
02
Property Assessment & Valuation
Local governments determine property taxes through real estate assessments. A local assessor evaluates the property’s value, typically based on fair market value, which is then used to calculate annual tax obligations.
Assessment rules vary by location. For example, California generally limits annual assessed value increases to 2%, while Texas may allow property values to increase by up to 10% each fiscal year under certain circumstances.
03
Paying Property Taxes
Property taxes are local taxes used to fund essential services such as schools, police, fire departments, infrastructure improvements, and other community programs.
Because these taxes are determined locally, rates can vary significantly between counties and states. Tax bills are generally issued annually, although payment deadlines depend on the property’s location.
04
Selling Your Property
Selling real estate can create tax consequences depending on how long you have owned the property. Properties held longer may qualify for more favorable long-term capital gains tax rates.
If a primary residence meets IRS eligibility requirements, homeowners may exclude up to $250,000 (single) or $500,000 (married filing jointly) of profit from the sale. Any gains above the exclusion amount may be subject to capital gains taxes.
05
Additional Real Estate Taxes
Beyond property and capital gains taxes, some transactions may involve additional taxes. Certain states and municipalities impose transfer taxes when real estate changes ownership.
Rental property investors may also need to consider the Net Investment Income Tax (NIIT), which can apply an additional 3.8% tax on qualifying investment income.
06
Managing Tax Payments
Property owners are responsible for paying applicable taxes when they are due, even if they do not receive a notice. Failure to pay property taxes may result in penalties, interest charges, or a tax lien against the property.
If paying taxes becomes difficult, some local tax offices may offer installment plans or other payment options.
07
Long-Term Tax Planning
Managing multiple properties and tracking changing tax rules can become complicated. Working with experienced tax professionals can help property owners understand their obligations, prepare for future tax changes, and develop effective tax strategies.
REAL ESTATE TAXES
Your Tax Guide Starts Here
Whether you’re new to taxes or looking for a quick refresher, this video provides an overview of the essential concepts to help you navigate the information with confidence.
3 Steps to Create an Invisible Investor Strategy
The greatest mistake that people make when it comes to asset protection for real estate is not understanding the risks that are waiting out there for them. This eBook reveals the structure you should follow to ensure your hard earned money is protected from frivolous lawsuits and costly tax mistakes.