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Introduction to Taxation
CHAPTER 13
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California
Real Estate Principles
Real Estate Principles
Chapter 13
Introduction to Taxation
Thomson South-Western
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Ch 13
<=
span
style=3D'font-size:88%'>•2. List=
the
rules regarding the date and manner of payment of real property taxes; descri=
be
the tax sale procedure in the event of nonpayment of property ta=
xes.
<=
span
style=3D'font-size:88%'>•4. List =
the
income tax advantages of real estate ownership, including the changes due to
recent revisions in the tax laws.
![](3D"slide0025_image011.gif")
Ad
Valorem “According to Value=
”
•Real
Property Taxes
•<=
span
style=3D'font-size:86%'>House
•<=
span
style=3D'font-size:86%'>Motor Home
•<=
span
style=3D'font-size:86%'>Boat
•<=
span
style=3D'font-size:86%'>Apartment
building
Personal Property Taxes
•<=
span
style=3D'font-size:86%'>Sales Tax
•<=
span
style=3D'font-size:86%'>License Fee
•<=
span
style=3D'font-size:86%'>Use Tax
•<=
span
style=3D'font-size:86%'>Transfer Tax
![](3D"slide0002_image013.gif")
![](3D"slide0002_image015.gif")
Re=
al
Property Taxes
Assessed at full cash value=
Assessed 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;
3.One-time tax
![](3D"slide0003_image016.gif")
Pr=
oposition
13
•Change of ownership form required to tax office=
3;
•Cash value x 1% =3D Annual property tax + local taxes
•Example: $200,000 lot x 1% =3D $2,000
<=
/span>
•Annual property tax x 2% per year =3D next year=
’s
tax
•Example=
:
• Year 1 $200,000 x 1% =3D $2,000=
3;
• =
;
2 $2,000 x 102%=
=3D
$2,040 =
;
• =
;
3 $2,040 x 102%=
=3D
$2,080 =
;
• =
;
4 $2,080 x 102%=
=3D
$2,122.42 =
;
• =
;
5 $2,122.42 x 1=
02% =3D
$2,164.87
PROPO=
SITION
13
•Full Cash Value<=
span
style=3D'mso-tab-count:1;width:2.4%'> =3D $500,000
•X 1% + local =
% =3D x 1.25%
<=
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•Property Tax =3D $6,250
•
•Ownership sin=
ce
March 1975
•3/75 value + per=
yr.
Max=3D present value
• x 1% + local %
• present tax
•Upon ownership
change
•Current price pa=
id
(full cash value)
•X 1% + local %&#=
13;
•Present tax
=
•
•New add=
itions
only taxed at current value on new construction, not the entire property.
No<=
/b> Tax Change
•Between spouses
•<=
/span>First $1 million of real property <=
span
style=3D'position:absolute;top:50.72%;left:7.15%;width:85.68%;height:49.27=
%'>from parents to their children
=
•
Propo=
sitions
60 & 90
<=
span
class=3DB1B style=3D'position:absolute;left:-4.29%'>–Homeowners age 55 years and over
<=
span
class=3DBB style=3D'position:absolute;left:-4.76%'>•Proposition 60: in the sa=
me
county.
<=
span
class=3DB1B style=3D'position:absolute;left:-4.1%'>–Only if that county's boa=
rd of
supervisors agrees.
![](3D"slide0026_image018.gif")
Real Property Tax Year
Fiscal Year
=
Jan &n=
bsp;
Jul
Sep
Nov
Dec
Feb
Apr
Jun
=
Jan 1 – Becomes a lien on the property
<=
/span>
• =
;
- File tax exemptions prior
![](3D"slide0005_image019.gif")
1
1
1
1
10
1
10
30
July 1 - Fiscal tax ye=
ar
begins
Sept 1 - Tax rate determined=
Nov 1 - 1st installment due (Jul 1 – Dec=
31)
Dec 10 =
- 1st installment delinquent
Feb 1 - 2nd installment due (Jan 1 – Jun=
30)
Apr 10 - 2nd installment delinquent
Jun 30 - Fiscal tax year end=
s
Ta=
x Sale
•A 10% penalty added to each late installment
<=
/span>
•June 8 delinquent tax list published
•June 30 property”Sold” to state
![](3D"slide0007_image020.gif")
![](3D"slide0007_image022.gif")
Real
Property Tax Exemptions
•1. California Homeowner’s Exemption $7,000 &=
#13;
![](3D"slide0006_image024.gif")
![](3D"slide0006_image026.gif")
HOMEOWNER’S EXEMPTION
•Owner occupied by
January 1 and filed by February 15
•
•$7,000 off full =
cash
value
•
•$500,000 full ca=
sh
value
• -7,000 homeowner’s exempt
•$493,000 taxable
value
•
•Saves approx. $7=
0
•($7,000 x 1%)
Sp=
ecial
Assessments Liens
•Tax liens and assess=
ments
have priority over all other liens.
•Street Improvement A=
ct of
1911
<=
span
class=3DB1B style=3D'position:absolute;left:-4.43%'>–Assessme=
nts
noted on tax bill
<=
span
class=3DB1B style=3D'position:absolute;left:-3.82%'>–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 bonds
•Skirts around property tax limitations of Prop 13&=
#13;
•Boom for developers
<=
span
style=3D'font-size:88%'>•Broker must disclose to prospective purchaser
=
<=
span
style=3D'font-size:88%'>•May 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
![](3D"slide0014_image028.gif")
PERSONAL
RESIDENCE
Major Tax Advantages for Homeowners:&#=
13;
1. Subject to a $1 million dollar limitation
2. The interest on money borrowed to =
purchase a first and seco=
nd
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.
![](3D"slide0027_image030.jpg")
Interest
Deduction
on Resi=
dence
•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 deducti=
on
every 2 years.
•May not deduct
depreciation, maintenance or operation expenses.
•Any gains above these amounts are taxed at the <=
/span>current capital gain tax =
rate.
Installment sale
Sale with down payment & loan.
![](3D"slide0028_image032.jpg")
•
Tax is due as loan is repaid over term.
Income
Property
<=
span
class=3DB1B style=3D'position:absolute;left:-3.99%'>–Deprecia=
tion
<=
span
class=3DB2B style=3D'position:absolute;left:-3.71%'>•27 &frac=
12;
years for residential income property
Annual Deduction
Operating Expenses
T
Taxes
(Property)
Insurance
M
Maintenance
M
Management
U
Utilities
R
Reserves
for Replacement
I
Investment
property
•Vacant land (unimproved property)
![](3D"slide0019_image034.jpg")
Tra=
de or
Business Property
•Owner derives major =
source
of livelihood from the property
![](3D"slide0020_image036.jpg")
1031
Tax–Deferred Exchanges
1.Pay no taxes at time of equal exchange
2.The new property must be “like for like” kind&#=
13;
3.Any “boot”
(cash) received is taxable The exchange may <=
/span>be simultaneous or delayed.
4.If delayed there are rigid timetables and the exchange is <=
/span>frequently called a “Starker” exchange.<=
span
style=3D'mso-hansi-font-family:"Times New Roman";font-size:75%;mso-special=
-format:
lastCR;display:none'>
![](3D"slide0009_image038.gif")
![](3D"slide0009_image040.gif")
+ $25,000 cash
![](3D"slide0009_image041.gif")
![](3D"slide0009_image042.gif")
Value
$200,000
Basis 100,000&#=
13;
Mortgage 50,000
Value
$300,000
Basis 150,000&#=
13;
Mortgage 75,000
=
Non-personal
residence
•Exchange – IRC 1031
•Tax liability is not forgiven - Defers (postpones)=
tax due, NOT tax “free”
•Close of escrow date rules:
![](3D"slide0011_image044.jpg")
<=
span
style=3D'font-size:86%'>–Close concurrent
<=
span
style=3D'font-size:86%'>–Delayed – accommodator
<=
span
style=3D'font-size:83%'>•45 days to name the new property
<=
span
style=3D'font-size:83%'>•180 days (6 months) to close the escrow
<=
span
style=3D'font-size:86%'>–Mortgage relief (Boot)
Regist=
ered
Domestic Partners
•RDP cannot file joint
income tax returns for either state or federal taxes.<=
/span>
Revie=
w
Quiz Chapter 13
1.The homeowner’s exemption, excluding local <=
/span>assessments, saves approximately how much in property taxes?
a.$100
b.$80
c.$70
d.$40
<=
span
style=3D'font-size:75%'>2.The
proposition that allows certain homeowners to transfer their property tax base to another home i=
n the same county is:
<=
span
style=3D'font-size:86%'>a.Proposition
13
<=
span
style=3D'font-size:86%'>b.Proposition
57
<=
span
style=3D'font-size:86%'>c.Proposition
60
<=
span
style=3D'font-size:86%'>d.Proposition
90
Revie=
w
Quiz Chapter 13
<=
span
style=3D'mso-special-format:"numbullet3\,3";position:absolute;left:-8.62%'=
>3.The
second installment of real property taxes is delinquent if not
paid by:
Revie=
w
Quiz Chapter 13
<=
span
style=3D'mso-special-format:"numbullet3\,4";position:absolute;left:-6.47%'=
>4.Which
of the following is true?
a.A
person cannot use a homeowner’s exemption and a veteran’s
exemption on the the same home
=
b.Real
property taxes become a lien on the first Monday in
March
<=
span
style=3D'mso-special-format:"numbullet0\,1";position:absolute;left:-5.9%'>=
c.A
12% penalty is added for delinquent property taxes
d.California
has special property tax exemptions for senior citizens 45 year=
s or
older
Revie=
w
Quiz Chapter 13
5.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.$502,420
b.$504,010
c.$506,220
d.$520,200
•
<=
span
style=3D'font-size:86%'>a.December
10
<=
span
style=3D'font-size:86%'>b.February
15
<=
span
style=3D'font-size:86%'>c.April
10
<=
span
style=3D'font-size:86%'>d.June
1
Revie=
w
Quiz Chapter 13
7.When foreigners sell U.S. property the Foreign Investment in Real Property Tax Act (FIRPTA) may <=
/span>require what percentage be withheld from the sale =
proceeds?
Revie=
w
Quiz Chapter 13
Revie=
w
Quiz Chapter 13
<=
span
style=3D'mso-special-format:"numbullet0\,1";position:absolute;left:-6.85%'=
>b.It
is based on the front footage of the property
<=
span
style=3D'mso-special-format:"numbullet0\,1";position:absolute;left:-6.9%'>=
d.Assessment
must be paid within six months
9.Under certain conditions, a single home owner may =
except up to how much in tax free gains from the s=
ale of a their personal home?
a.$500,000
b.$300,000
c.$250,000
d.$125,000