TAXATION OF

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Chapter 13
447

• TAXATION OF
• REAL ESTATE

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447

• I. REAL PROPERTY TAXES

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• Taxes determined according to the value of the
  property (Ad Valorem Tax) and are paid annually
  or semi-annually.
• Ad Valorem mean taxed according to value.

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County Assessor -
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• The county officer who is responsible for
  determining the assessed valuation of land,
  improvements. and personal property used as a
  residence or in business.
• All real property is assessed except
• a. that which is owned by the government.
• All tangible personal property which is used in
  business is also assessed.
• a. Other personal property (intangible) is not
  assessed or taxed.

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County Tax Collector -
450

• County officer who collects the property taxes.
• 1. Does not assess property or levy taxes.
• 2. Requires a tax sale if taxes are not paid.

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A. Proposition 13 -
450

• Limits the amount of property taxes to a maximum
  of 1 of the March 1, 1975 market value.
• There is a cumulative increase of 2 in market
  value for each year since 1975.
• Property improvements made after March 1, 1975
  are added to value in the year they are made.
• If property is newly constructed or sold, the tax
  is 1 of the sales price or market value,
  whichever is higher, plus the 2 cumulative
  increase each succeeding year.

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451
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B. Real Property Tax Base Is Transferable (Props
60 90) -
450

• Under the following conditions, homeowners may be
  permitted to transfer their current Proposition
  13 tax base with them when they move
• 1. Homeowners over the age of 55.
• 2. Replacement home of equal or lesser value.
• 3. Purchased within two years of original sale.
• 4. New home is in the same county, or another
  participating county.

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C. Property Taxes Become a Specific Lien
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• 1. Property taxes due upon real property are, in
  effect, liens against that specific property.
• 2. Business personal property taxes (trade
  fixtures) also become liens against that specific
  real property on the same tax bill.

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D. Property Tax Time Table
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• T H I N K
• No Darn Fooling Around

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E. Property Tax Proration Problem
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• Who owes whom how much?
• Remember Escrow prorates property taxes using
  old (sellers) assesses value (tax bill).

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453

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F. Homeowner's Property Tax Exemption -
456

• A deduction on the property tax bill of the first
  7,000 of assessed valuation of an owner-occupied
  property.
• 1. All personal property is exempt from property
  taxes.
• 2. Property must be owner's principal residence
  on March 1.
• 3. Homeowner must file for this between January 1
  and April 15 to get the full exemption.

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G. Homeowner's and Renter's Property Tax Rebate -
456

• A percentage of household income on the first
  8,500 of assessed valuation is returned to the
  taxpayer.
• 1. Any resident 62 or older with a household
  income of less than 12,000.
• 2. Persons under 62 who are totally disabled.
• 3. Must own and occupy the home.
• 4. A similar program provides rebates to renters.

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H. Disabled and Senior Citizen's Property Tax
Postponement -
457

• The state absorbs all or part of the property tax
  on their home.
• A lien is placed on the property for the amount
  the state has to pay.
• This lien is payable when the taxpayer moves or
  dies.
• The state gains title to the home if the person
  dies.

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I. Veteran's Exemption -
457

• Entitled to an annual 4,000 property tax
  exemption against the assessed value of one
  property (principal residence or additional
  property)
• 1. For California residents who served in the
  military during a time of war.
• 2. Also available to
• a. widow of veteran.
• b. widowed mother of deceased veteran.
• c. pensioned father or mother of deceased
  veteran.
• 3. Limited to property assessed at under 5,000
  (10,000 if married).
• a. for disabled veterans who qualify, the
  assessment limit can be raised up to 100,000.

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J. Tax Exempt Property
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• All federal, state, county, or city government
  property. The federal government owns 45 of
  California land.
• Religious, charitable, medical, or educational
  property (nonprofit).
• 50 of all growing crops, young orchard trees,
  immature timber, and young grape vines.

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K. Property Tax Appeals -
457

• A claim that property has been unfairly assessed.
  
• Contact the County Board of Equalization (the
  property tax appeals board).
• They will consider the case and reduce, increase,
  or set a new assessment.
• Property tax appeals should be made between July
  2 and August 26.

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L. Delinquent Tax Sale (Book Sale)
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• Tax collector publishes a list of delinquent
  properties (Notice of Intent To Sell) by June 8.
• Owner then has a five-year redemption period.
• a. Property may be redeemed by anyone upon
  payment of
• 1. taxes
• 2. interest
• 3. costs and
• 4. redemption penalties
• b. Buyer obtains a Certificate of Redemption.

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M. Second Sale (After Five Years)
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• If owner does not redeem within five years,
  property will be deeded over to the state.
• Former owner may now redeem property only if the
  state has not sold the property at auction.

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N. Sale to the Public -
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• Delinquent property is sold by the county tax
  collector.
• Property is sold to other taxing agencies or to
  the highest bidder for cash.
• Purchaser receives a tax deed.

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459

• II. SPECIAL ASSESSMENT TAX

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• A SPECIAL ASSESSMENT TAX is levied by the city or
  county supervisors, or by the voters themselves,
  requiring the cost of specific local
  improvements, such as streets, sewers, irrigation
  or drainage, to be assessed to the properties
  which benefit from them.

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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 sewers construction,
  however they cannot use the Act to purchase land
  for subdividing.

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B. Mello-Roos Community Facilities Act -
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• Municipal bonds issued to fund streets, sewers,
  and other infrastructure needs before a housing
  development is built.

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460

• III. DOCUMENTARY TRANSFER TAX

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460

• A tax that is applied to the consideration paid
  or money borrowed when transferring property,
  except for any remaining loans or liens on the
  property.
• Rate is 55 cents for each 500 of consideration
  and borrowed funds or any fraction thereof that
  exceeds 100.
• Charged to the seller as part of escrow.
• In most cities the county collects the tax and
  gives half to the city.

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• IV. GIFT AND ESTATE TAXES

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A. Federal Gift Taxes -
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• Charged on gifts exceeding 11,000 annual
  exemption per donee.
• Donor - the person or persons giving the property
  as a gift.
• Donee - the person or persons receiving the gift
  of property.

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B. Federal Estate Taxes -
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• A tax return must be filed for the estate of
  every resident of the United States whose gross
  estate exceeds 2,000,000 in 2006) in value at
  the date of death.

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• C. There are No California State Inheritance and
  Gift Taxes.

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• V. FEDERAL, STATE, AND LOCAL INCOME TAXES

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• FEDERAL AND STATE INCOME TAXES are taxes charged
  on personal income by the state and federal
  government.

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• VI. TAXES ON PERSONAL RESIDENCE

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A. Deduction of Interest -
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• One of the major tax advantages of owning real
  estate.
• When buying these homes you may finance up to 1
  million (1,000,000) with all the interest paid
  out during the year fully tax deductible.
• An additional deduction is available on the
  interest from home equity loans, taken for any
  purpose, even buying a second home, of up to
  100,000 in principal.

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B. Deduction of Property Taxes -
467

• Property taxes on your 1st and 2nd homes are
  deductible from your income taxes.

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C. Deduction of Prepayment Penalties -
467

• If you pay off or drastically reduce your home
  loan balance, there may be a prepayment penalty.
• These are tax deductible.

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D. Sale of Your Residence -
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• If a person sells a residence at a profit but
  buys a more expensive residence within two years,
  (before or after) no income tax is owed on the
  gain at that time.
• No capital gains tax on first 250,000 (500,000
  if married) of profit from the sale of a home.
• a. Must buy another residence to avoid taxes.
• b. Can only be used once every two years.

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• VII. TAXES FOR INCOME PRODUCING PROPERTIES

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Investors can annually deduct
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• 1. Mortgage Interest on Loans (no maximum)
• 2. Property Taxes
• 3. Prepayment Penalties
• 4. Operating Expenses
• 5. Depreciation of Improvements

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A. Depreciation of Business Property -
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• Annual tax deduction based on wear, tear, and
  obsolescence on investment property.
• Does not apply to personal residence.
• Depreciation is deducted only from the cost of
  the building and improvements.
• Taxes will probably have to be paid on this
  deduction when the property is sold.

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B. Advantages of Sale-Leaseback
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• To seller
• All lease payments can be deducted from income
  taxes and owner receives cash for the building.
• To buyer
• The purchase price can be used as the new basis
  for depreciation and establishes a new
  depreciation schedule.

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• VIII. SALE OF REAL PROPERTY

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A. Capital Assets -
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• Includes your personal residence (including your
  second home) and any other real estate because
  they are long-term investments.
• Capital Gains - taxed at a lower rate than is
  ordinary income.
• Capital Losses - can be deducted from capital
  gains.

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Four Capital Gains Tax Rates
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• 20 maximum capital gains tax rate if held for
  more than 18 months
• 15 maximum capital gains tax rate if held for
  more than 7 years
• 10 capital gains tax rate if net income is less
  than 50,000
• 5 capital gains tax rate (over 7 years) if net
  income is less than 50,000

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B. Federal Income Tax Rates
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• Progressive Taxes - taxes where the rates
  (percentage paid) increase as the amount to be
  taxed increases.
• Marginal Tax Rate - the rate that the next dollar
  earned puts you into.
• Regressive Taxes - use the same rate no matter
  how much is spent or earned. Sale tax is an
  example of a regressive tax.

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C. Accounting for the Sale of Real Estate
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• The method of determining a profit or loss on the
  sale of real property is spelled out by the
  Internal Revenue Service.
• Steps 1 and 2 must be completed before
  determining the profit or loss on a sale (Step 3).

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Example
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• (1) Cost Basis (Purchase price) 500,000
• Improvements 200,000
• 700,000
• - Depreciation (tax records) 30,200
• Adjusted Cost Basis 669,800
• (2) Sale price 1,000,000
• - Sale Expenses 32,500
• Adjusted Sale Price 967,500
• (3) Adjusted Sale Price 967,500
• - Adjusted Cost Basis 669,800
• Gain 297,700

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• IX. INSTALLMENT SALES AND EXCHANGES

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A. Installment Sale of Real Estate -
470

• Extend the sale payments on a property over more
  than one calendar year.
• Gains do not all fall in one tax year.
• This could keep the person's tax rate lower.

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B. Exchanges Tax Deferred -
471

• An exchange is transfer of real estate where one
  property is traded for another.
• If it is an even trade, no capital gains tax will
  be charged.
• Any Boot (consideration given by one party in
  addition to the traded property) is entirely
  taxable if it constitutes a gain.
• Exchanges are complicated and require careful
  accounting and legal guidance.

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• X. WE ARE NOW TAX COLLECTORS

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A. Federal Tax Collection Requirements -
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• Persons buying property from foreign investors
  are required to set aside 10 of the purchase
  price as a withholding for the Internal Revenue
  Service.
• Withholding is kept to insure that the foreign
  investor will pay taxes on the capital gain.
• Both the buyer and broker share liability.
• Residential property purchased for under 300,000
  is exempt.

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B. State Tax Collection Requirements and
Exemptions -
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• Persons buying property from foreign or
  out-of-state investors may be required to set
  aside 3.5 of the sales price for the Franchise
  Tax Board.
• The exemptions from the buyer withholding 3.5 of
  the sales are
• a. Sales price is 100,000 or less.
• b. Property is sellers principle residence,
  under certain conditions.
• c. Seller signs California Residency Declaration.
• d. Seller receives a waiverFranchise Tax Board
  Form 567A.

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• XI. OTHER TAXES
• PAID BY BROKERS

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Business License Taxes (City Income Taxes) -
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• A tax against real estate brokerage firms based
  upon their gross receipts.
• A nominal amount that usually starts at about
  100.
• Other city taxes may also include employee
  payroll taxes.

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Chapter 13 - Summary
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• Real Property Taxes
• Ad Valorem
• County Assessor
• County Tax Collector
• County Board of Supervisors
• Prop 13
• Assessed valuation

• Tax due dates
• No Darn Fooling Around
• 5 year redemption Period
• Public tax auction
• Homeowners Property Tax Exemption

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Chapter 13 - Summary
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• Special Assessment Taxes
• Documentary Transfer Tax
• Mello Roos
• Federal Gift Taxes
• Federal Estate Taxes

• Capital gains
• Federal taxes are progressive
• Installment sales
• Tax deferred exchanges
• Foreign Investors