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What is Real Estate Tax? (Sale of Real Estate Tax and Property Tax)

Real estate tax usually refers to the local tax paid on the value of real estate each year, whereas the broader term “property tax” can encompass personal property taxes. The sale of real estate can trigger a tax on the profits of the sale known as “capital gains tax”.

What is real estate tax?

Normally, when someone refers to “real estate tax” they mean the local, county-level tax payable annually on the assessed value of the real estate. Your annual real estate tax bill is an ad valorem tax on real property. An “ad valorem” tax is a tax calculated based on the fair market value of property. Usually, this tax is assessed and collected by the county-level government. Many people refer to ad valorem real estate taxes simply as “property taxes.”

Real estate tax vs. property tax

Although the terms property tax and real estate tax are often used interchangeably, the term “property tax” is a broader term that may include both personal property taxes and real property taxes. Personal property means any item of property other than real estate. Personal property is moveable; real property is immovable.

In addition to ad valorem real estate taxes, local governments may also levy an ad valorem tax against the value of personal property. Personal property subject to ad valorem tax may include business assets such as machinery and equipment. Transfer taxes on vehicles, boats, and other personal assets are also a form of ad valorem property tax.

Property tax rates on real estate range from .3% of property value to 2.5% of property value, with the national average being around 1%. See this breakdown for more detail on rates.

Sale of real estate tax (capital gains tax)

When real estate is sold, the seller may be liable for a tax on the profits of the sale called capital gains tax. If the seller bought the real estate for $100,000 and sold it for $200,000, he may be liable for tax on the gain of $100,000. The rate of tax on the sale of real estate depends on how long the seller held the real estate and the seller’s income bracket. The rate may be 0%, 15%, or 20% on the amount of gain. See the 2021 capital gains tax rates here.

If the seller owned the real estate for less than one year before selling it, then the gain will be taxed at short-term capital gains rates. If the seller owned it for more than one year, then the gain will be taxed at long-term capital gains rates. Short-term capital gains rates are similar to ordinary income tax rates and are higher than long-term capital gains rates, which motivates real estate investors to hold assets for more than one year when possible.