Real Estate Principles: Taxation Of Real Estate

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Taxes involved in real property

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1. property taxes

2. special property taxes

3. Documentary transfer taxes

4. Gift and inheritance taxes

5. Income taxes

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section 1

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real property taxes

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notes

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a city or county receives most of its operating revenue from the assessment and collection of real property taxes

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real property taxes

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are taxes determined according to the value of the real property, and are paid annually or semi-annually

these taxes are called ad valorem

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ad valorem tax

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is a tax that is charged in proportion to the value of the property

basically means taxed according to value

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county assessor

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is the county office who has the responsibility of determining the assessed valuation of land, improvements, and personal property used in business

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notes

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the county assessor accumulates a list of all private owners of real property in his or her jurisdiction. the assessment roll is used to establish the tax base for the county

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notes

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county assessor assesses, county board of supervisors sets tax rates

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county tax collector

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is the county officer who collects the real property taxes.

if the real property taxes are not paid, the county tax collector will eventually require the property to be sold at a tax sell

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proposition 13

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limits the amount of taxes to a maximum of 1% of the march 1, 1975, market value of the property plus cumulative increase of 2% in market value each year thereafter

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assessed valuation

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is set at 100% of the propertys selling price or fair market value, whichever is higher, plus a 2% increase for every year the property was owned since march 1, 1975.

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real property tax base is transferable

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real property is assessed each time it is transferred, sold, at 100% of its selling price or market value. A change in ownership statement, must be filed with assessor within 45 days of change

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property taxes become a specific lien

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property taxes due upon real property are, in effect, liens against that specific property

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property tax time table

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novenmber 1, first installment

december 10, first installment is delinquent

february 1, second installment

april 10, second installment deliquent

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No darn fooling around

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July 1 through June 30th is one whole tax year.

county assessors complete their assessment rolls by July 1, the beginning of the government fiscal year.

Property taxes become a lien on real property January 1st

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property tax proration

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if the seller of the property has paid both the 1st and 2nd installments of the property taxes he gets prorated the difference.

the first step is to determine the amount of taxes per month by dividing the annual tax bill by 12 months

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homeowners property tax exemption

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is a deduction on the property tax bill of the first $7,000 of assessed value of an owner-occupied property

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supplemental property tax bill

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the law requires reassessment of property immediately when it changes ownership or when new construction is completed

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homeowners and renters property tax rebate

senior citizens and disabled persons

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this is a property tax relief law for any resident who is 62 years of age or older as of January 1, and has a household income of not more than $12,000 for the calendar year.

the amount of the property tax rebate is a percentage of household income on the first $8,500 of assessed value

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notes

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senior citizens may be able to defer the payment of property taxes on their residence. In order to find out if they qualify for the program, senior citizens should contact the state tax board

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disabled and senior citizens property tax postponement

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seniors who are 62 years of age or older and have a household income of $24,000 or less may qualify for this tax postponement assistance program, This program offers them the option of having the state pay all or part of the taxes on their homes. in return, a lien is placed on there property for the amount the state has to pay.

the specific becomes payable when the taxpayer moves or dies

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veterans exemptions

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any California resident who served in the military during a time of war is entitled to an annual $4,000 property tax exemption against the assessed value of one property.

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tax exempt property

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in California there are some properties that are partially or totally tax exempt. all real property that is owned by the federal, state, county, or city government is automatically tax-exempt.

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notes

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property of nonprofit organizations used for religious, charitable, medical or educational purposes is tax exempt.

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property tax appeals

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people who feel that the assessment of their property is not correct may appeal the assessment.

appeals would be directed to the board of equalization, the property tax assessment appeals board, in the county in which the property is located between July 2nd and august 26.

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delinquent tax sale

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each year, on or before January 8th, the county tax collector publishes a list of tax delinquent properties. this is his or her, notice of intent to sell, for all properties on which the property taxes have not been paid for one year.

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notes

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if taxes are not paid on or before June 30th, the property is sold to the state. this sale starts the running of the redemption period, which is 5 years

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Book sale

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once the tax collector has published a list of tax delinquent properties it starts a 5 year redemption period. if the property is not redeemed within 5 years, it will be deeded over to the state

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second sale

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after 5 years, if the property has not been redeemed, the delinquent property is deeded to the state

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sale to the public

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the county tax collector will sell the state-owned properties to other taxing agencies or to the highest bidder at a public tax auction

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section 2

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special assessment tax

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special assessment tax

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is levied by a city council or a county board of supervisors, with the voters approval, for the cost of specific local improvements such as streets, sewers, irrigation, or drainage.

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notes

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the difference between property taxes and special assessments is that special assessments are levied for cost of specific local improvements, while property tax revenue goes into the general fund

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special assessment district board

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is the official body that levied special assessments.

as a rule, a district issues its own bonds to finance particular improvements such as water distribution systems, parking facilities, street lights, and many other types of developments

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street improvement act of 1911

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developers can use the act to construct and improve streets and for sewer construction, however they cannot use the act to purchase land for subdividing

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the Mello-roos community facilities act

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the Mello-roos community facility act is another type of improvement bond

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Notes

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A seller must disclose the existence of a Mello-roos bond on the property

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Mello-roos liens

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are municipal bonds issued to fund streets, sewers, and other infrastructure needs before a housing development is built. this financial device allows developers to raise money to complete off-site improvements in a house or condo subdivision

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section 3

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documentary transfer tax

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notes

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$.55 per $500 is paid only on the new amount of money, cash down and new financing, not on any assumed financing

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documentary transfer tax

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is a tax that applied to the consideration paid or money borrowed when transferring property, except for any remaining loans or liens on the property

however, this tax does not apply to any liens or encumbrances that remain on the property as part of the transfer

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city transfer taxes

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the city of Los Angeles initiated a transfer tax to be paid by sellers when a property is sold.

the current charge is $4.50 per $1,000 of the selling price

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section 4

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gift and estate taxes

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property give away

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1, while living is federal gift tax

2. after death is federal estate taxes

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note

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the federal gift tax law also provides for a $14,000 annual exemption per donee.

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federal gift tax law while living

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when a family gives property, whether real or personal, to another individual, there may be federal gift taxes that must be paid.

if the value of the property is higher than exempt amount, the donor must pay a gift tax.

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donor

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is the person or persons giving the property as a gift.

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donee

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is the person or persons who receives the property as a gift

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federal estate tax after death

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a federal estate tax return must be filed for the estate of every deceased resident of the united states whose gross estate exceeds $5,000

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no state gift and inheritance taxes

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the California state inheritance tax and the California state gift tax were repealed

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section 5

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federal and state income taxes

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notes

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the annual federal income tax form 1040 and the state income tax form 540 are bookkeeping or accounting summaries of the prior years financial facts

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notes

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under federal income tax laws most real estate licensees are considered independent contractors. according to California real estate law, most real estate licensees are considered employees of the broker

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section 6

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taxes on personal residence

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notes

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homeowners can deduct these three items from their income taxes based on their personal residence

1. mortgage interest on loan, trust deeds

2. property taxes

3. prepayment penalties

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notes

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there are 5 basic areas of federal and state income tax laws that are incentives to owning real estate

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basic income tax incentives for real estate owners

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1. interest deduction

2. sale of your residence

3. depreciation

4. installment sales

5. exchanges

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deduction of interest

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deduction of interest on your home loan from your income taxes is one of the major tax advantages of owning real estate.

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deduction of property taxes

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property taxes on your first and second homes are deductible from your income taxes. this makes us feel better about paying local property taxes

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deduction of prepayment penalties

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prepayment penalties are also deductible from your income taxes. if you pay off or drastically reduce your home loan balance, there may be a prepayment penalty

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sale of residence

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when selling a personal residence, the seller can deduct up to $250,000 or $500,000 if married on any capital gain

this can be used only once every 2 years

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section 7

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taxes for income-producing properties

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notes

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investors of income producing properties can annually deduct these items from income taxes.

1. mortgage interest on loans, no maximum

2. property taxes

3. prepayment penalties.

in addition they can deduct

4. operating expenses

5. depreciation

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depreciation for tax purposes

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is a yearly tax deduction for wear and tear on investment property that is deducted from the taxpayers income on his or her income tax form.

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notes

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only the buildings and other improvements on income, trade, or business property can be depreciated. land cannot be depreciated under federal income tax law

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notes

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residential homes and apartments property depreciation schedule.

minimum of 27.5 years, straight line

commercial improvements depreciation schedule.

minimum 39 years straight line

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section 8

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sale of real property

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capital assets

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in real estate, a capital asset includes your personal residence including your second home and any other real estate because they are long term investments

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capital gains

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are taxed at a lower rate than ordinary income

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capital losses

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can be deducted from capital gains

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progressive tax

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is a tax that charges a higher percentage as income rises

so as you make more money, not only does the amount increase, but the rate at which income is taxed also increases

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marginal tax rate

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is the rate that the next dollar earned puts you into

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regressive taxes

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use the same rate no matter how much is spent or earned.

sales tax would be an example

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section 9

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installment sales and exchanges

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installment sale

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is the sale of real estate in which the payments for property extend over more than one year calendar year

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notes

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installment sales are used to spread a gain over two or more calendar years so that the entire gain is not taxed all in the first year

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1031 exchange

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is a transfer of real estate where one party trades property for anothers property.

the property must be of like kind in nature or character

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notes

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to defer all current taxes, a party in an exchange would need to receive a more valuable building with a larger loan on it than the current property and pay compensation to the other party for any difference in the equities

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boot

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is any net cash or net mortgage relief that a participant in an exchange might receive in addition to the actual property

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notes

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exchanges are popular among apartment owners and commercial property investors.

this is because these owners are usually in a high-income tax bracket, and exchanging enables them to move up to a more valuable property without paying taxes on the gain

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tax-deferred exchanges

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in a tax-deferred exchange, boot is defined as cash or mortgage relief given in addition to the property. boot is the amount received to balance the equities in the exchange

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section 10

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federal and state income tax laws, escrow usually takes care of this

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federal tax collection requirements and exemptions, if a foreigner $300,000 or more

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persons buying property from a foreign investor, seller, required to set aside 10% of the purchase price for the internal revenue service.

this 10% withholding is kept by the IRS to ensure that property capital gains taxes are paid

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state tax collection requirements and exemptions.

if a foreigner or resident of another state, $100,000 or more

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persons buying property from foreign or out of state investors may be required to set aside 3.3% of the sales price for the franchise tax board

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section 11

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other taxes paid by brokers

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business license tax

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a city may levy a tax against real estate brokerage firms, which is based upon the gross receipt,

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sales tax

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sales tax is a tax on only tangible personal property