©2011 Cengage Learning Chapter 13 Introduction to Taxation California Real Estate Principles ©2011 Cengage Learning

©2011 Cengage Learning

Chapter 13Introduction to Taxation

California Real Estate Principles


Ch 13Describe the real property assessment

procedure as required by Proposition 13.List the rules regarding the date and manner

of payment of real property taxes; describe the tax sale procedure in the event of nonpayment of property taxes.

Explain homeowners, veteran's, and senior citizen's property tax exemptions.

List the income tax advantages of real estate ownership, including the changes due to recent revisions in the tax laws.


Ad Valorem “According to Value”Real Property Taxes

HouseMotor HomeBoatApartment building

Personal Property TaxesSales TaxLicense FeeUse TaxTransfer Tax


Real Property TaxesAssessed at full cash value

General (Ad Valorem) Taxes

1. For general support of government

2. Levied against all taxable real property

3. Recur annually

Special Assessment Taxes

1. For specific purpose

2. Levied only against properties benefited

3. One-time tax


Proposition 13Change of ownership form required to tax officeCash value x 1% = Annual property tax + local

taxesExample: $200,000 lot x 1% = $2,000Annual property tax x 2% per year = next year’s

tax

Example:

Year 1 $200,000 x 1% = $2,000

2 $2,000 x 102% = $2,040

3 $2,040 x 102% = $2,080

4 $2,080 x 102% = $2,122.42

5 $2,122.42 x 102% = $2,164.87 ©2011 Cengage Learning

PROPOSITION 13Full Cash Value = $500,000X 1% + local % = x 1.25%Property Tax = $6,250

Ownership since March 19753/75 value + per yr. Max= present value

x 1% + local %present tax

Upon ownership changeCurrent price paid (full cash value)X 1% + local %Present tax

New additions only taxed at current value on new construction, not the entire property.


No Tax Change Between spouses First $1 million of real

property from parents to their children


Propositions 60 & 90

Homeowners age 55 years and over Allows the transfer of their low, existing property

tax base to another home of equal or lower valueProposition 60: in the same county. Proposition 90: to another California county

Only if that county's board of supervisors agrees.


Real Property Tax YearFiscal Year

Jan Jul Sep Nov Dec Feb Apr Jun

Jan 1 – Becomes a lien on the property

- File tax exemptions prior


1 1 1 1 10 1 10 30

July 1 - Fiscal tax year beginsSept 1 - Tax rate determinedNov 1 - 1st installment due (Jul 1 – Dec 31)Dec 10 - 1st installment delinquentFeb 1 - 2nd installment due (Jan 1 – Jun 30)Apr 10 - 2nd installment delinquentJun 30 - Fiscal tax year ends

Tax Sale

A 10% penalty added to each late installmentJune 8 delinquent tax list publishedJune 30 property “Sold” to stateFive-year redemption periodUn-redeemed property deeded to stateTax collector publishes notice of intent to sellPublic auction tax saleController’s tax deed


Real Property Tax Exemptions

1. California Homeowner’s Exemption $7,000

Reduces property tax ($7000 x 1% = $70)

Owner as of January 1-File by February 15

2. Veteran’s Exemption $4,000

3. Property tax postponement law A. senior citizens (age 62 or older) B. blind or disabled

4. California Renter’s Relief Credit against state income tax liability


HOMEOWNER’S EXEMPTION

Owner occupied by January 1 and filed by February 15

$7,000 off full cash value

$500,000 full cash value -7,000 homeowner’s exempt$493,000 taxable value

Saves approx. $70($7,000 x 1%)


Special Assessments Liens

Tax liens and assessments have priority over all other liens.

Street Improvement Act of 1911Assessments noted on tax bill For streets, sidewalks, lighting, water, sewer or

benefit the owners directly such as for neighborhood parks, schools, and fire stations.


Mello-Roos Community Facilities Act of 1982

Failure to disclose allows buyer a 3-day right of rescission, and may result in disciplinary action for the licensed agent

Municipal bondsSkirts around property tax limitations of Prop

13Boom for developersBroker must disclose to prospective purchaserMay not be fully tax deductible


INCOME TAXATION

State and federal income tax

A progressive tax Agents: Recommend tax counsel

Tax consequences may be a material fact

Need good record keeping on property


PERSONAL RESIDENCE

Major Tax Advantages for Homeowners:

1. Subject to a $1 million dollar limitation 2. The interest on money borrowed to purchase a first and second home is fully deductible against the homeowner’s income 3. A homeowner may also borrow against the equity up to $100,000 and still deduct the interest as homeowner interest


Interest Deduction

No taxable gain recognized on Residence

Homeowners may claim an exception from taxation on profit from the sale of their personal residence up to a maximum amount of $250,000 for singles, up to $500,000 for married couples.

Homeowner must have owned & resided in home 2 of last 5 yrs.

Can take the deduction every 2 years.May not deduct depreciation, maintenance or

operation expenses.Any gains above these amounts are taxed at the

current capital gain tax rate.©2011 Cengage Learning

Installment sale

Sale with down payment & loan.

Tax is due as loan is repaid over term.


Income Property

Depreciation27 ½ years for residential income property39 years for non-residential income property


Annual DeductionOperating Expenses

T Taxes (Property)Insurance

M MaintenanceM ManagementU UtilitiesR Reserves for Replacement

I

Investment property

Vacant land (unimproved property)


Trade or Business Property

Owner derives major source of livelihood from the property


1031 Tax–Deferred Exchanges

1. Pay no taxes at time of equal exchange

2. The new property must be “like for like” kind

3. Any “boot” (cash) received is taxable The exchange may be simultaneous or delayed.

4. If delayed there are rigid timetables and the exchange is frequently called a “Starker” exchange.


+ $25,000 cash

Value $200,000Basis 100,000Mortgage 50,000

Value $300,000Basis 150,000Mortgage 75,000

Non-personal residence

Exchange – IRC 1031Decreases basis on new property by the gain

deferred on old propertyTax liability is not forgiven - Defers

(postpones) tax due, NOT tax “free”Close of escrow date rules:

Close concurrentDelayed – accommodator

45 days to name the new property180 days (6 months) to close the escrow

Mortgage relief (Boot)©2011 Cengage Learning

Registered Domestic PartnersRDP cannot file joint income tax returns for either

state or federal taxes.


Review Quiz Chapter 13

1. The homeowner’s exemption, excluding local assessments, saves approximately how much in property taxes?

a. $100b. $80c. $70d. $40


Review Quiz Chapter 132. The proposition that allows certain homeowners to

transfer their property tax base to another home in the same county is:a. Proposition 13b. Proposition 57c. Proposition 60d. Proposition 90


3. The second installment of real property taxes is delinquent if not paid by:

a. November 1

b. December 10

c. February 1

d. April 10



4. Which of the following is true?a. A person cannot use a homeowner’s exemption

and a veteran’s exemption on the same homeb. Real property taxes become a lien on the first

Monday in March c. A 12% penalty is added for delinquent property

taxesd. California has special property tax exemptions for

senior citizens 45 years or older

Review Quiz Chapter 135. A property was valued at $500,000 for property tax

purposes. According to Proposition 13, what would be the maximum value for property tax purposes in two years, assuming the owner did not make capital improvements?

a. $502,420b. $504,010c. $506,220d. $520,200


Review Quiz Chapter 136. To obtain a full homeowner’s exemption, a new

homeowner must file between January 1 and:a. December 10b. February 15c. April 10d. June 1


Review Quiz Chapter 137. When foreigners sell U.S. property the Foreign

Investment in Real Property Tax Act (FIRPTA) may require what percentage be withheld from the sale proceeds?

a. 3-1/3%b. 5%c. 10%d. 13%



9. Under certain conditions, a single home owner may except up to how much in tax free gains from the sale of a their personal home?

a. $500,000b. $300,000c. $250,000d. $125,000


8. When a special assessment is made on a piece of property under the Street Improvement Act of 1911:a. Property owner can deduct principal and interest b. It is based on the front footage of the propertyc. It is appraised as per the amount of square

footaged. Assessment must be paid within six months



10.An investor who has owned a property for 2 years and then sells for a gain most likely will pay:a. Capital gains taxesb. Ordinary income taxesc. Only California, not federal taxesd. Not pay taxes as a sale for cash qualifies as a

1031 exchange

Answers to Review Quiz Chapter 13

1. C 6. B

2. C 7. C

3. D 8. B

4. A 9. C

5. D 10. A


Documents

©2011 Cengage Learning Chapter 13 Introduction to Taxation California Real Estate Principles ©2011 Cengage Learning