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1
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2
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- Most real property, and some personal property is subject to taxatio=
n.
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3
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- 1. “FULL CASH VALUE”&nb=
sp;
- Basis for tax is the full value shown on County
Assessor’s 1975=
/76
Tax Bill with increases up to 2% each year allowed. Property is reappraised up=
on
resale and most other changes of ownership, which brings assessed v=
alue
in line with current market value.
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- ASSESSED VALUE – 100% of “Full Cash Value” as set =
by
County Assessor. If va=
lue
appears high, owner can file appeal with Tax Appeals Board.
- PUBLIC UTILITIES – Asses by State Board of Equalization.
- TAXES – Limited to 1% of “full cash value” plus any
voter approved indebtedness.
- “AD VALOREM” – Means according “to
value”. Property=
taxes
are said to be an “ad valorem” tax.
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5
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- Tax year, or fiscal year , is July 1st through June 30th.=
- Taxes become a lien on January 1 preceding each fiscal year.
- First Installment – Due November 1st; delinquent af=
ter
December 10th
- Second Installment – Due February 1st; delinquent a=
fter
April 10th.
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- NO =3D November 1st
- DARN =3D December 10th
- FOOLING =3D February 1st
- AROUND =3D April 10th
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7
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- If taxes are unpaid the following steps are taken:
- County tax collector publishes list of all unpaid tax bills in
“Notice of Impending Default” on or before June 8th=
of that fiscal year.
- If not paid by June 30th, taxes are in default and proper=
ty
becomes known as “tax defaulted property.”
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8
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- County tax collector holds lien on property for next 5 years.
- a. owner remains in undisturbed possession.
- b. Owner may redeem property by paying delinquent taxes, costs,
interest and penalties.
- 4. After 5 years of being “tax defaulted property”, Coun=
ty
Tax Collector has power to sell at public auction by sealed bid sale=
or
to a public agency. Or=
iginal
owner can redeem up to final sale date.
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- 5. County tax collector must attempt to sell the property within 2
years of the time the property becomes subject to sale. Upon sale of property, tax
collector issues Tax Deed to purchaser.
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10
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- Tax Exemptions must be filed by April 15th.
- VETERANS - $4,000 of “full cash value” provided veteran
does not own property worth $20,000 or more ($40,000 if married).
- HOMEOWNERS - $7,000 of
“full cash value” on owner-occupied single family or
multi-family residences and condominiums.
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- The $7,000 Homeowners Exemption can only be used on the homeowners
principal residence. T=
he
$7,000 exemption amounts to $70 a year in tax savings, or $7,000 X 1=
% =3D
$70
- The Veterans Exemption can be used on other property, the exempt
property does not have to be the principal residence. The Veterans exemption amou=
nts to
$40 a year in tax savings, or $4,000 X 1% =3D $40.
- (The Tenants Exemption amounts to $70)
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- Some tangible personal property is subject to taxation. (Boats, store
fixtures, machinery, etc.).
- UNSECURED PERSONAL PROPERTY
(Tenant does not own the building) – Taxes are due when
billed, becomes delinquent after August 31st.
- SECURED PERSONAL PROEPRTY – (Tenant owns building) –
Normally due and payable on same dates as real estate taxes.
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13
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- Person acquiring an interest in real property must file statement
with assessor within 4=
5 days
of recording deed.
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- Levied for the cost of specific local improvements such as streets,
sewers, lighting, etc.
Property taxes and assessment lines have priority over all ot=
her
liens but are on a parity with each other.
- A. Street Improvement Act of 1911 – Widely utilized for street
improvements.
- 1. City or county contracts for work. Upon completion, each owne=
r is
sent bill for his or her proportionate share (based on front foo=
tage
of property.)
- a. Owner has 30 days to pay all, part or none of bill.
- b. Bonds are issued to cover unpaid portions and owner
pays the cost over bonding period. Interest received
by bond holder is free of federal income taxes.
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- A tax adopted by most California Counties which is levied at the tim=
e a
deed is recorded.
- Rate is $0.55 per $500 of consideration or part thereof.
- Consideration is usually selling price of property. The exception is the amoun=
t of
any assumed loans.
- There is no tax if consideration is $100 or less.
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16
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- Since most real estate transactions have important income tax
consequences, a basic understanding is vital to all real estate
licensees. Tax conscio=
usness
begins prior to the acquisition.
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- Ordinary Income – Income derived from wages, operation of a
business, commissions, portfolio investments, passive investments,
etc.. Taxed at rates o=
f 10%
to 35% depending on the amount of income.
- Capital Gains – Profits realized from sale of Capital Assets or
Section 1231 Assets. M=
aximum
tax rate is 15%.
- Portfolio Investments – Investments in stocks, bonds or savings
accounts that earn interest, dividends, royalties, etc.
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- Capital Assets –
Property held for investment (stocks, bonds, land) or property
held for personal use (residence, jewelry, auto).
- Section 1231 Assets – Property used in taxpayer’s trade =
or
business (rental property, broker’s real estate office,
manufacturing plant).
- Passive Investments – Investments in business ventures in which
taxpayer does not “materially participate” in its
operation. To
“materially participate”, investor must own at least 10%
interest and make bona fide management decisions.
- a. For income property investors, approving tenants, capital
improvements, and repair of the improvements.
- b. Limited partners in a limited partnership do not “material=
ly
participate”.
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- Passive Investment Income – Income from passive investments.
- Passive Investment Losses – Losses from passive investments can
only be used to offset passive income. There is one major exception
Active Real Estate Investors may deduct up to $25,000 of losses agai=
nst ordinary
income. (Limited
Partnerships do not qualify).
- Book Value – Val=
ue on
taxpayer’s books and is used to establish gain or loss at time=
of
sale; Referred to as “cost”, “adjusted cost”=
, or
basis; Consists of ori=
ginal
cost of property, plus any capital additions, less any depreciation
allowed.
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- Tax Shelter – Legal way of reducing ones taxes. Includes use of depreciation
allowances, installment sale and tax deferred exchanges.
- Involuntary Conversion – Forced sale by owner to government in
condemnation proceedings.
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21
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- Classification is important when considering gains, losses,
depreciation, or whether eligible for “tax free” exchang=
e.
- Personal Residence – Place owned by and where taxpayer is
living. May be a sing=
le
family residence, mobile home, condominium unit or yacht.
- Investment Property – Vacant land held for an expected increa=
se
in value.
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- 3. Income Property – Property earning income for owner who does
not rely on income as major source of income.
- Property Used in a Trade or Business (Section 1231 Asset) –
Property in which owner derives major source of livelihood from or
property used for operation of their business.
- Dealer Property – Property held for sale to customers. May be subdivided lots, tra=
ct of
new homes, or miscellaneous properties being bought and sold by an
active licensee or investor.
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- Special rules apply to taxpayer’s personal residence.
- Gains and Losses –
Gains are considered capital gains. Losses are not deductible e=
xcept
to offset a gain that resulted from a previous residence transaction=
.
- Expenses – Taxpayers filing “long form” returns who
itemize deductions may deduct expenses for property taxes, interest =
on
loans and part of any uninsured casualty losses. No deduction for depreciati=
on or
maintenance expenses.
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24
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- Tax Free Gains – Married homeowners of any age may exclude up =
to
$500,000 in gain from the sale of their principal residence. Single persons may exclude =
up to
$250,000 in gain.
- a. To qualify as a principal residence the property must have been
owned and used by the taxpayer as the principal residence for perio=
ds
aggregating two years or more within the past 5 years ending on the
date of sale.
- b. This tax break can be reused every two years.
- c. Gains may no longer be rolled-over into the new basis of a
replacement residence if a new residence is purchased.
- d. The age benefit for persons 55 or older is no longer in effect.=
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- A type of sale in which the seller takes back all or part of the
purchase price in the form of a loan or a real property sales contra=
ct.
- On the sale of investment property or a residence, the seller is on=
ly
taxed on monies received, as they are received, and not on the enti=
re
gain realized in the year of the sale.
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26
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- Recapture Rule - On th=
e sale
of income property, or trade or business property, any depreciation =
that
had been taken on the property will be taxed as ordinary income whet=
her
taxpayer receives any payments or not. Depreciation recapture inco=
me is
fully recognized in year of sale.
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27
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- An owner of property held for the production of income ore used in a
trade or business is allowed to deduct from income a reasonable amount for
depreciation. This is =
to
compensate the owner for exhaustion, wear and tear, and normal
obsolescence of the owner’s property.
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28
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- Application – Applies to real and personal property, and all
improvements on the land including fruit and nut bearing trees of
commercial orchards.
- a. Land cannot be depreciated.
- b. Assessor’s valuation may be used to establish ratio of la=
nd
value to improvement value.
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29
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- Life of Property – Following must be used on new or used
property acquired after December 31, 1986.
- a. Residential rental property – 271/2 Years
- b. Commercial real property – 311/2 Years if acqu=
ired
prior to 5/13/93; 39 y=
ears
if acquired after 5/13/93
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30
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- Method of Calculating – Owner may only use Straight
Line method.
- Example: A buyer purch=
ases
an Eight Unit Apartment Building on January 5, 2004, for
$1,000,000. The estima=
ted
value of the land is $300,000.
The value of the improvements is $700,000 or Building Value
(less) Land Value =3D Building Value.
The improvements, or building can be depreciated over 27=
1/2
years, or $700,000/271/2 Years =3D $25,455 Annual Depreci=
ation
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31
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- The Taxable Gain on the sale of real property is the selling price, =
less
the adjusted tax basis.
- In our previous example, our investor purchased a $1,000,000 building
with an improvement value of $700,000. Since this was an apartment
building you divided the improvement value by 271/2 years=
and
came up with an annual deduction of $25, 455.
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- If the building increased in value 5% a year, and the owner kept the
building for 10 years then sold the building, their gain would look =
like
this;
- Estimated Building Value
- 5% a year for 10 years =3D‘s&=
nbsp;
(1.05)10 =3D 1.6289
- Then $1,000,000 X 1.6289 =3D $1,628,900
- Round that off to a
$1,700,000 Selling Price
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- Adjusted Tax Basis;
- Annual Depreciation
X Years =3D To=
tal
Depreciation
- $25,455 X 10 Years =3D $254,550
- Original Cost (less) Depreciation =3D Adjusted Tax Basis
- $1,000,000 - $254,550 =3D $745,450
- Indicated Gain from sale;
- Selling Price of Building $1,700,000
- Less Adjusted Tax Basis ($ =
745,450)
- Indicated Gain $
954,550
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34
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- Financing has tax benefits
- Interest On Loans
- a. Income to lender when received – excess prepaid interest =
not
permitted.
- b. Deductible expense for borrower at time of payment.
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- Pre-Payment Penalties – Considered as interest.
- Discount Points – When paid by:
- a. Borrower – classified as deductible interest
- b. Seller R=
11;
considered a cost of the sale
- Finance Charges – Loan costs (commission, fees, escrow, etc.) =
must
be amortized over the term of the loan.
- Refinancing – has no tax effect, doesn’t affect basis of
property, does not cause gain or loss.
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- Many tax advantages can be gained through the sale of the property b=
y an
owner with provisions for continued occupancy by the seller under a
lease agreement.
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- Advantages Seller/Less=
ee
- a. Creates working capital.
- b. Rent is fully deductible.
- c. Lease can qualify for tax free exchange if it is for 30 years or
more.
- d. Can sell or assign lease.
If a profit is made it qualifies for long term capital gains=
.
- e. Can depreciate any later improvements over term of lease.
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- Advantages to Buyer/Lessor
- a. Establishes new basis for depreciation.
- b. Has pre-arranged tenant which aids financing.
- c. Reports rental payments as income when received.
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- Basis is the starting point for computing depreciation. Depreciation will determine=
the
amount of gain or loss upon the sale of the property. Basis is determined by meth=
od of
acquisition.
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40
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H. Establishing
Basis continued<=
/div>
- Purchase – Cost of acquisition including escrow fees, title
insurance, etc.
- Gift – Usually donor’s adjusted basis plus gift tax, if =
any.
- Inheritance – Fair market value at the date of death.
- Joint Tenancy – Survivor’s original interest remains at =
book
value; interest receiv=
ed
from deceased is fair market value at date of death.
- Community Property – Surviving spouse has new basis on entire
property equal to fair market value at date of death.
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41
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- The Internal Revenue Code permits a taxpayer to defer paying taxes o=
n a
gain or profit by exchanging the property. Although called “tax
free”, it merely defers the gain and only applies to certain t=
ransactions.
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42
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- Tax Law only permits the tax deferred exchange of “like
kind” properties.
- Like kind properties include:
- 1. Investment property.
- 2. Property held for the production of income.
- 3. Property used in your trade or business.
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43
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- Two situations can trigger, at least, partial taxation of an exchang=
e.
- 1. Boot – When the equity of the parties to the exchange is
unequal, the deficient party must give something (cash, a note or
other property) to the other party to offset the deficiency. This addition of unlike pr=
operty
is called “boot”.
- 2. Mortgage Relief – If one of the parties to the exchange
reduces their loan liability they receive mortgage relief and may =
be
subject to a tax liability.
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44
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- The “Even or Up Rules” provide that the loans and the va=
lue
of the building exchanged into have to be at least EVEN, preferably the loans and the
value of the exchanged into building will be UP.
- If you use the “Even or Up Rules” your tax deferred
understanding will be a good deal more easy.
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45
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- A. B.
- $300,000 Market Value $400,000
- ($200,000) Tr=
ust
Deed ($250,000)
- $100,000 Equity Exchange $150,000
- If “A” trades the property to “B”,
“B” will receive $50,000 in boot to equalize the equitie=
s as
well as $50,000 in mortgage relief.=
This could result in a tax liability to “B”.
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46
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- The party receiving the boot and/or mortgage relief will be taxed on=
the
net amount received up to the amount that could be realized as gain =
on
the exchange.
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47
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- A. B.
- $300,000 Market Value $400,000
- ($200,000) Tr=
ust
Deed ($250,000)
- $100,000 Equity Exchange $150,000
- In this example “B” has a potential gain of $150,000. “B” would have =
to pay
takes on $50,000 in cash, and $100,000 in Mortgage Relief.
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48
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- Some gifts and large estates left at the death of the owner may be
subject to state and federal gift or inheritance taxes.
- A. State Inheritance and State Gift Taxes – The state gift t=
ax
law and inheritance tax law were repealed as of June 8,
1982.
- B. State Estate Tax – Any estate that is subject to a
federal
estate tax is also subject to a state estate tax.
- 1. Only large estates are subject to the tax.
- 2. Amount subject to the state tax is 100% deductible
from amount subject to the federal estate tax.
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49
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- All property left to the surviving spouse is exempt from taxes.
- Other estates valued at $1,000,000 or more in 2003 and,
- $1,500,000 or more in 2004, are subject to estate taxes.
- Joint tenancy holdings are included in the taxable estate even though
excluded for probate purposes.
- The value of real estate for estate taxes is the “Fair Market
Value at date of death, less existing loans. This becomes important to u=
s when
setting up trusts.
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50
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- All gifts in excess of $10,000 per year per person are subject to a
federal gift tax.
- A husband and wife could give up to $20,000 to one person without a =
gift
tax being imposed.
- Gift tax rates are the same as estate tax rates.
- Gifts for medical bills or for school tuition, in any amount, are ex=
empt
from gift taxes.
- Although a gift tax may be due the federal gift tax law allows the t=
ax
to be offset by a special credit.&n=
bsp;
The credit is a maximum $192,800.
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51
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52
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- First half taxes become delinquent on real property after:
- a. The first Monday in March
- b. July 1st
- c. December 10th
- d. The first Monday in May
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53
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- 2. Real estate taxes for the coming year become a lien on the real
property:
- a. On July 1st each year
- b. The first Monday in November
- c. If not paid by December 10th
- d. On January 1st each year
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54
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- When property has become known as “Tax Defaulted PropertyR=
21;,
the owner will retain title to the property for five years. During this period the
delinquent tax payer.
- a. Is under no obligation to pay future taxes.
- b. Must pay rent.
- c. Must vacate the property.
- d. Can continue to possess the property.
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55
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- Assume that a street is improved under the 1911 Street Improvement
Act. After the bill is
presented to the property owner for the work, the property owner is
allowed how many days to pay it before it goes to bond?
- a. 20 days
- b. 30 days
- c. 60 days
- d. 90 days
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56
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- The cost basis of a single family residence can be adjusted for whic=
h of
the following?
- a. Depreciation
- b. Interest paid on a loan
- c. Fire insurance premiums
- d. Room or patio addition
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57
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- Book value of an income producing property, for tax purposes, is best
described as the:
- a. A difference between the original cost and the current market
value.
- b. Original cost of the property less financing costs.
- c. Original cost of the land and buildings, plus the cost of any
additions, less any depreciation.
- d. Current market value of the property.
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58
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- An individual is not permitted to deduct a loss on his or her Federal
Income Tax return if the loss resulted from the sale of:
- a. A personal residence.
- b. A former residence that was leased at the time of sale.
- c. Income producing property.
- d. Personal property used in business of the taxpayer.
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59
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- Mr. Carter was able to purchase an apartment building for $225,000.<=
span
style=3D'mso-spacerun:yes'> The property had been appra=
ised
for $250,000 and the tax assessor had placed a value of $200,000 on
it. If Carter paid $50=
,000
down and financed the balance, his cost basis for income tax purposes
would be:
- a. $200,000
- b. $225,000
- c. $250,000
- d. $175,000
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60
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- The second installment of county real property taxes becomes delinqu=
ent
after:
- a. February 10
- b. December 31
- c. April 10
- d. March 15
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61
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- “Boot” has an important influence when considering:
- a. A sale under a conditional sales contract
- b. A percentage lease
- c. A sale and leaseback
- d. A tax free exchange
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62
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- Which of the following sales would result in ordinary income in rela=
tion
to income tax?
- a. The sale of a property held for investment purposes
- b. The sale of a personal residence
- c. The sale of subdivision homes
- d. The sale of an apartment building by and investor
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63
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- A federal income tax advantage could result from:
- a. A deduction for depreciation
- b. The sale of property on the installment plan
- c. A tax free exchange
- d. Any of the preceding
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64
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- One of the benefits under the federal income tax law that is availab=
le
to individuals who own the home they reside in and who also itemize
their deductions, is that they may deduct which of the following
expenses:
- a. Depreciation
- b. Principal payments on their home loan
- c. Interest payment on their home loan
- d. Maintenance and improvement costs.
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65
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- For federal income tax purposes, which of the following types of
property can be depreciated?
- a. Vacant land
- b. An owner-occupied single family residence
- c. An owner-occupied condominium unit
- d. A peach tree orchard
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66
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- Tax consciousness with respect to real estate transactions should ta=
ke
place:
- a. Prior to the purchase
- b. After the property is
sold
- c. At the close of escrow
- d. At the end of the tax year
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67
|
- A duplex worth $200,000 which has a first trust deed of $160,000 is
exchanged for an apartment worth $225,000 with a lien of $182,000. The amount that would be gi=
ven in
the form of cash or a note to balance the exchange would be?
- a. $3,000
- b. $10,000
- c. $13,000
- d. $15,000
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68
|
- If an out-of-state resident was&nbs=
p;
to ask when the first installment of the county real property
taxes becomes due, you should answer:
- a. December 10th
- b. November 1st
- c. March 1st
- d. July 1st
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69
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- The real property tax rate for the county is set by the:
- a. County Board of Supervisors
- b. County Tax Assessor
- c. County Tax Collector
- d. State Board of Equalization
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70
|
- Mr. and Mrs. Jones purchased a residence for $270,000. After living in the home fo=
r one
year they sold it for $250,000.&nbs=
p;
The amount of deduction that can be taken for this capital lo=
ss
for federal income tax purposes is:
- a. $20,000
- b. $10,000
- c. 25%
- d. Nothing
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71
|
- The Real Estate Tax Fiscal year is for the period:
- a. January 1 through December 31
- b. December 1 to Nove=
mber
30
- c. July 1 through June 30
- d. April 10 to April 10
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72
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73
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