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©2011 Cengage Learning
Chapter 13Introduction to Taxation
California Real Estate Principles
©2011 Cengage Learning
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.
©2011 Cengage Learning
Ad Valorem “According to Value”Real Property Taxes
HouseMotor HomeBoatApartment building
Personal Property TaxesSales TaxLicense FeeUse TaxTransfer Tax
©2011 Cengage Learning
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
©2011 Cengage Learning
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.
©2011 Cengage Learning
No Tax Change Between spouses First $1 million of real
property from parents to their children
©2011 Cengage Learning
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.
©2011 Cengage Learning
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
©2011 Cengage Learning
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
©2011 Cengage Learning
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
©2011 Cengage Learning
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%)
©2011 Cengage Learning
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.
©2011 Cengage Learning
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
©2011 Cengage Learning
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
©2011 Cengage Learning
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
©2011 Cengage Learning
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.
©2011 Cengage Learning
Income Property
Depreciation27 ½ years for residential income property39 years for non-residential income property
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Annual DeductionOperating Expenses
T Taxes (Property)Insurance
M MaintenanceM ManagementU UtilitiesR Reserves for Replacement
I
Investment property
Vacant land (unimproved property)
©2011 Cengage Learning
Trade or Business Property
Owner derives major source of livelihood from the property
©2011 Cengage Learning
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.
©2011 Cengage Learning
+ $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.
©2011 Cengage Learning
Review Quiz Chapter 13
1. The homeowner’s exemption, excluding local assessments, saves approximately how much in property taxes?
a. $100b. $80c. $70d. $40
©2011 Cengage Learning
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
©2011 Cengage Learning
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
Review Quiz Chapter 13
©2011 Cengage Learning
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
©2011 Cengage Learning
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
©2011 Cengage Learning
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%
©2011 Cengage Learning
Review Quiz Chapter 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
©2011 Cengage Learning
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
Review Quiz Chapter 13
©2011 Cengage Learning
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
©2011 Cengage Learning