Tax Law: Understanding the Difference Between Sales and Income Taxes
It is important for every property owner to understand the nature of property and transfer taxes. Basically, this refers to any tax that is paid on any property when it is transferred from one person to another, said an expert tax law attorney. Generally, property tax is a local tax assessed by the local government on real property based on its market value at the date of transfer. This tax is owed on the sale of the property and not on the transfer of the property. Property tax is different from sales tax which is generally levied on the transfer of goods and services and not on transfer of property. Also, unlike income tax, property tax is rarely collected by the individual.
Transfer tax is a complex tax due on property and transfer of property is a complex activity. It is mandatory for any property owner to pay this tax based on a set formula that factors in current market value of the property, rate of inflation, cost of living index, property tax rate, number of years the property is owned and purpose of transfer. If the owner satisfies these conditions then there is no need to pay the tax. However, if the owner fails to satisfy these conditions then he or she has to pay the tax on behalf of the government in order to recover his losses.
These tax payments are very important and it is for the owners’ advantage to ensure that they pay them on time. They can do so by hiring a tax lawyer to help them with the due diligence work involved in such transactions. The tax lawyer will help in analyzing the transactions and will also provide necessary guidance in due diligence activities. In case of any doubts or queries, the owner should give it to the tax lawyer and the lawyer will try to clear all your doubts.
There are some individuals who take advantage of the nature of property and transfer taxes and run away with huge amounts of money. In order to avoid running into such a situation, it is essential to understand the basic policies and understand the technicalities involved in tax law. A good tax law attorney will be able to help you with all your questions related to tax payments and it is better to get the services of one from the start.
In general, there are two categories of land ownership i.e. deeded and freehold properties. As the name suggests, the freehold property is easier to transfer taxes on and the deeded property cannot be transferred taxes on. This classification is usually followed where the property is used commercially. As the nature of the property indicates that it cannot be used commercially, commercial purpose can be deduced from the ownership of the property and hence its transfer taxes can be minimized. However, such transfer taxes cannot be avoided if the property is used commercially.
Other than this classification, there are other factors which determine the tax on the property. These include the type of use of the property (ownership or rent), type of improvements made to the property, value of the property etc. The nature of property and transfer taxes also varies with respect to how the property is to be valued. Valuing the property is a complex process and many technicalities are involved. Hence, it is advisable not to try to do the valuation on your own and take professional help from qualified persons. You should also ensure that the certified value is true as wrong values have caused umpteen amounts of loss to many persons over the years.