TAXATION CHAPTER 14

1
TAXATIONCHAPTER 14
2
REAL PROPERTY TAXES With the passage of
Proposition 13, the California Supreme Court has
defined property tax as "an acquisition value
system". Basically Proposition 13 has provided a
"new" system.
3
Taxes are billed on a fiscal year, which is July
1 of each year to June 30 of the following
year. Taxes are paid as follows November 1
Due December 10 _at_ 500 pm Delinquent February
1 - Due April 10 _at_ 500 pm - Delinquent
4
Remember, when it comes to property tax, there is
No Darn Fooling Around with property taxes.
Mr. Mrs. Redman receive their 2003-2004 tax
bill, and the total real property tax is 2,400.
They pay 1,200 on November 1, 2003 and another
1,200 on February 1, 2004.
5
CHANGE IN OWNERSHIP STATEMENT Any person
acquiring an interest in property subject to
local taxation must notify the county Recorder or
Assessor by filing a Change in Ownership
Statement within 45 days of the date of recording
or, if the transfer is not recorded, within 45
days following a written request from the
Assessor.
6
PROPOSITION 13 Usually the Fair Market Value
(FMV) is defined as the purchase price.
Under Proposition 13 the property tax is 1 of
the value at the time of purchase
Each county may add an additional property tax to
the 1. Usually a county will add 0.25 to 1
more.
7
In this class we will use 1.25
Mr. Smith purchased home for 300,000. Assume the
property tax is 1.25 for the area. Thus his tax
would be3,750 per year or 1,875 every 6 months.
Under Proposition 13 the property value may be
increased each year at an index rate determined
by the California Industrial Relation's Board or
2, which ever is the lesser.
8
Mr. Smith purchased home for 300,000. The first
year he will pay 3,750 (300,000 x 0.0125) this
year. Assume that index is increased by 2.
His new tax value for next year would be
300,000 1.02 306,000.
The taxes would be 3,825 per year (306,000
0.0125) the next fiscal year.
9
Mr. Wilson purchased some land to build his home
at a cost of 50,000. After six months of sweat
and physical labor, he finished his home. The
only costs was that of materials for 100,000.
Total cost of the home was 150,000. Because of
his ability and labor the home had a FMV (fair
market value) of 250,000. The local county
assessor could legally assess the home for
250,000.
10
PROPOSITION 8 Decline-in-Value Reassessment,
approved by the voter in 1978.
Allow taxable values of any property to decline
below the factored base year value established by
Proposition 13 to be reassed at the lower value.
11
Mr. Wilson purchased a property in 1989 for
250,000. The base year will be 1989 and will be
placed on the tax rolls at 250,000. In 1991 Mr.
Wilson found out that he could only sell his
property for 150,000. In other words, his
property declined in value by 100,000. He now
can petition the county to have his property
enrolled at the value of 150,000.
12
PROPOSITION 58 1. A principal residence (a home)
on which there is a homeowner's exemption can be
transferred to parent or child with no change in
the real property basis.
2. The first 1,000,000 of other real property
between parent and child is exempt from
reassessment.
13
The code defines a child as a natural child (any
child born of the parents), any stepchild or
spouse of that stepchild as long as the
relationship of stepparent and stepchild exists,
a son-in-law or daughter-in-law of the parent(s)
as long as the relation exists or a child who was
adopted by the age of 18.
14
Mr. Wells wants his mom to purchase his home. His
real property tax basis is 100,000. If his tax
rate is 1½ (0.015) for his area, then his annual
property tax will be 1,500 (100,000 0.015).
The home now has a FMV of 300,000. If mom buys
the home without notifying the county, then her
annual tax bill will be increase to 4,500
(300,000 0.015). But, if she files a SBE Form
PT-58, then she will retain her son's tax-basis
and her annual tax bill will be 1,500. This is a
savings of 2,000 per year.
15
If the property is NOT the transferor's principal
residence and is 1,000,000 or less, then the
transfer is excluded from reassessment.
If the assessed value is more than 1,000,000,
then the transfer must specify the amount and
allocation of the exclusion on the claim.
16
DOCTRINE OF STEPTRANSACTION If one transaction
depends upon another transaction, that is, if you
would not do the first transaction unless the
second transaction is done, this is referred to
as the doctrine of step-transaction and
step-transactions are not allowed in real
property tax transactions.
17
There are three members of the Doner family. Mom
Doner, son Bob Doner and daughter Sally Doner.
Bob wants to sell his property to his sister
Sally and they want to keep the same property tax
basis. So Bob sells the property to mom and
shortly thereafter, mom sells to daughter Salley.
Because this is a transfer between parent and
child they feel they have accomplished their
goal.
18
BOB (Son)
SALLY (Daughter)
.
MOM
The problem is that this transfer is a
steptransaction, according to IRS. Bob would not
have sold to mom unless Mom sold to Sally.
Therefore, this transaction would be disallowed.
19
PROPOSITION 60 Proposition 60 provides that a
qualified homeowner aged 55 or older may transfer
the current base-year value of his present
principal residence to a new replacement (that
is, to sell their old home and buy a new home),
with these conditions.
20
1. Both properties must be in the same county.
2. The claimant must be at least 55 years old as
of the date of transfer (sale). If married one of
the spouses must be 55 years or older
3. The original resident must be eligible for a
homeowners' exemption at the time of sale
(transfer).
21
4. The new home must be purchased within a two
year period before the sale of the old home or
within a two year period after the sale of the
old home.
5. If the new home is bought before or on the
same day of the sale of the old home, the
purchase price of the new must be equal to or
less than sales price of the old home.
22
If the new home is purchased within the first
year after the sale of the old home, the purchase
price may exceed the sales price of the original
residence by 5. Finally, if the new home is
purchased within the second year period of the
sale of the old home, then the purchase price may
exceed the sales price of the old home by 10.
23
Real Property Tax Base Time Line

Sale of Old Residence 2nd 1st
0 1st 2nd Yr. Yr. Yr. Yr. to or to or
5 10 less less
Sold Purchased
24
.
Mr. Prior purchases a new home for 190,000 this
year. He sells his old home after buying the new
home for 200,000. Since he purchased the new
home first and paid equal or less than the sales
price of his old home and he did so within a two
year period before the sale of his old home, he
is allowed to carry his old real property
assessment value to the new home.
25
If the old home had a real property assessed
value of 75,000, the new home would have a real
property tax basis of 75,000.
If the property tax rate is 1.25 then the new
property would have property taxes of 938
(75,000 0.0125) per year.
If Mr. Prior doesnt file for Prop 60, his
property taxes would be 2,500 (200,000
0.0125).
26
Mr. Harvey sold his old home for 200,000 today.
He purchases a new home for 200,000. Since the
purchase of the new home was equal to the sale
price of his old home and he did so within a two
year period before the sale of his old home, he
is allowed to carry his old real property
assessment value to the new home.
.
27
Mr. Evans purchased his old home for 75,000, and
sold it for 200,000 on March 22, 2000. He
purchased a new home for 210,000 on March 23,
2000. Since the purchase of the home falls within
the first year after the sale of his old home he
may purchase the new home for 5 more than the
sales price of his old home (200,000 5
210,000). Since he has met all the requirements,
his assessed value will be carried over to the
new home. His property tax basis would be
75,000.
.
28
Ms. Holmes purchased her old home for 75,000,
and sold the old home for 200,000 on April 2,
2000. She purchased a new home for 220,000 on
April 1, 2002. Since the sale of the home falls
within the second year period after the sale of
her old home, she may purchase the home for 10
more than the sales price of her old home
(200,000 x 10 220,000). Since she has met
all the requirements, she may carry over her real
property assessed value to the new home, or a
property tax basis of 75,000.
.
29
PROPOSITION 90 Proposition 90 is an extension of
Proposition 60.
Proposition 90 allows the purchase of the new
home in a different county in California.
However, the county the homeowner is planning to
move into may reject Proposition 90.
30
PROPOSITION 90 Counties that allow proposition 90.
Alameda Modoc Contra Costa Orange Inyo Riverside
Kern San Diego Los Angeles San Mateo Marin Santa
Clara Ventura
31
On September 2 this year, Ms. Knight sold her
principal residence in Anaheim, Orange County,
California for 300,000. She purchased it for
150,000, and today he property tax basis is
150,000. The property taxes are 1,875. On April
15 next year, she purchased a new home in Corona,
Riverside County, California for 200,000.
.
32
If she files a Form PT60, Claim for Replacement
Dwelling Base-Year Value Transfer, the county
assessor's office will then transfer the 150,000
base-year value assuming that the transfer meets
all of the other requirements.
33
On September 2 this year, Ms. Knight sold her
principal residence in , Victorville, San
Bernardino County, California (a non prop90
county) for 300,000. The base-year value at the
time of sale was 150,000. On April 15 next year,
she purchased a new home in Fullerton, Orange
County, California (a prop-90 county) for
200,000. If she files a Form PT60, Claim for
Replacement Dwelling Base-Year Value Transfer,
the county assessor's office will then transfer
the 150,000 base-year value assuming that the
transfer meets all of the other requirements.
.
34
On September 2 this year, Ms. Knight sold her
principal residence in Fullerton, Orange County,
California for 300,000. The baseyear value at
the time of sale was 150,000. On April 15 next
year, she purchased a new home in , Victorville,
San Bernardino County, California (a non prop90
county) for 200,000. Therefore she will be taxed
at the full assessed value of 300,000.
.
35
BUYING PROPERTY Before you can sell the property,
you need to buy a property.

• You will either
• Buy a home
• Buy investment type of property (rentals),
• Create a subdivision (are not investments nor
  homes and are treated differently for tax
  purposes).

36
TYPES OF BASIS The starting point for all tax
calculations on real estate property is the
original basis.
Original Basis the purchase price plus buying
costs
37
The basis will change over the time of ownership.
Depreciable Basis the amount of the original
basis that is allowed to be depreciated by tax
law.
Adjusted Basis the original basis plus
improvements less all depreciation taken.
38
HOME OWNERSHIP Two simple true and false
questions on home ownership.
39
Question 1 Mr. Bowman has two homes, one in the
city and one on the beach. He spends 4 days a
week in city home and 3 days a week at his beach
home. He decides to sell his beach home. Since it
is his home, he does not have to pay income taxes
on the sale the home at the beach. True or False
F
40
A taxpayer (husband and wife) can only have one
home (primary principle residence) at any one
time.
The primary principle residence is where the
taxpayer spends most of the time.
41
Question 2 Mr. Avila owned his home (principle
primary residence) for 1½ years and sells it.
Since it is his home, he will not have to pay
taxes on it. True or False
F
42
A Taxpayer must own his home for two years.
365 365 1 731 more than 2 years.
43
PRINCIPAL PERSONAL RESIDENCE A person (husband
wife) can only have one principal personal
residence at any one time.
The principal personal residence is where the
owner spends most of his/her time.
44
SECOND HOME All other personal residences are
considered to be second homes.
Second homes get no preferential tax treatment.
45
ORIGINAL BASIS OB PP BE Where OB
Original Basis PP Purchase Price BE Buying
Expenses
NOTE A Primary Principal Residence (home) cannot
be depreciated, like an investment property.
46
Mr. Johnson purchased a home for 100,000 and
paid 2,000 for buying expenses (closing costs).
His original basis is OB 100,000 2,000
102,000
47
ADJUSTED BASIS AB OB CI Where AB
Adjusted Basis OB Original Basis CI Capital
Improvements
48
Mr. Stigler has an original basis of 102,000.
During ownership he made a room addition for
20,000 and did landscaping, that cost 12,000.
His adjusted basis is AB 102,000 32,000
134,000
49
GAIN G SP SE - AB Where G Gain SP
Sales Price SE Selling Expenses AB
Adjusted Basis
50
Mr. Ball sells his home for 250,000 and it cost
him 24,000 to sell the property. His adjusted
basis is 134,000.
G 250,000 - 24,000 - 134.000 92,000
51
TYPES OF GAIN Realized Gain Recognized
Gain Excluded Gain
52
Mr. Ball in the last example had a realized gain
of 92,000. He will either recognize the gain,
pay taxes on the gain, exclude the gain, or not
pay taxes on the gain.
53
EXCLUDED GAIN A Single person can exclude
250,000 A married couple can exclude 500,000
To qualify for exemption, the home must have been
a principal residence for at least 2 years during
a five year period prior to the sale.
Only one spouse must be the owner during this
time period. But both spouses must have lived
there for a 2 year period.
54
EXAMPLE 1 OF THE EXCLUSION
1 2 3 4 5 X X
Mr. Ball purchased a home and lived in it the 1st
year and the 2nd year. He sells it in the third
year. He qualifies for the exclusion
55
EXAMPLE 2 OF THE EXCLUSION
1 2 3 4 5 X X
Mr. Ball purchase a home and lived in it the 1st
year and the 5th year. Therefore he lived in the
home two out of the last five years. He qualifies
for the exclusion.
56
Mr. Ball sold their home and had a gain of
52,000. They lived in the home for 5 years.
Thus, they can exclude the 92,000 gain. Put it
in his pocket and run.
The full exclusion can be used once every 2 years.
57
Mr. Jandists (single) sells his home for
500,000. His adjusted basis is 100,000. His
gain is 400,000 500,000 - 100,000
He can exclude 250,000 and the remainder is
taxable at capital gain rates. 400,000 -
250,000 150,000
58
CAPITAL GAINS Homes and investment properties
receive special tax considerations. They are
taxed as capital gain. There are two types of
capital gain (1) short term (2) long term.
If a property is held for one year or less (short
term), then it will be taxed at the 27 tax rate.
59
SHORT TERM Mr. Ford procures a house that he
rents on April 15, 1999 and sells on April 15,
2000. Since the time held is exactly one year, it
is short term and in the 27 tax bracket and if
he has a 100,000 gain. The taxes would be
27,000.
60
LONG TERM If the property is held for more than
one year it will be taxed as long term capital
gains.
The are two long term capital gain rates, and
they are based on the clients tax bracket.
61
If the seller is in the 15 tax bracket the
capital gains will be taxed at 10.
If the clients tax bracket is greater than 15,
the capital gains will be taxed at 15.
62
Mr. Rooks (single) sells his home for 500,000.
His adjusted basis is 100,000. His gain
is 400,000 500,000 - 100,000 He can exclude
250,000 and remainder is taxable at capital gain
rates. 400,000 250,000 150,000 150,000
15 22,500
63
REVIEW OF ORIGINAL BASIS OB PP
BE Where OB Original Basis PP Purchase
Price BE Buying Expenses
64
USING THE PROPERTY TAX BILL When examining what
portion of the property is land and what portion
is building.
Remember you cannot depreciate land.
The ratio of building to land is usually
determined from the property tax rolls.
65
Edmund RiggsThe County Tax Assessor12345 E.
Main St.Sunset City, CA 99999 Ms. Sarah
Giocomo1870 Elm LaneSunset City, CA 99999 Date
7/01/YY Land 3,000 Improvements 7,000 Total 10,
000
66
of Building 7,000 10,000 x 100 70
of Land 3,000 10,000 x 100 30
Therefore, only 70 of the purchase price maybe
depreciated.
67
DEPRECIABLE BASIS DB OB x I Where DB
Depreciable Basis OB Original Basis I
Percentage of Improvements
68
Maria Hernandez purchased a residential fourplex
for 490,000 and buying expenses of 10,000. It
has been determined the building is 70 of the
value of the property. The depreciable basis is
OB 490,000 10,000 500,000 DB 500,000 x
70 350,000
69
COMPUTING DEPRECIATION OF REAL PROPERTY There are
two types of real property 1. Residential
(27.5 or 40 years). 2. Non-Residential (39 or
40 years)
70
Residential and Non-residential property use
different depreciation schedules.
Non-residential
Residential
71
RESIDENTIAL
1 3.485 3.636 2 3.182 3.636 3 2.879
3.636 4 2.576 3.636 5 2.273
3.636 6 1.970 3.636 7 1.667
3.636 8 1.364 3.636 9 1.061
3.636 10 0.758 3.636 11 0.455
3.636 12 0.152 3.636
72
NON-RESIDENTIAL
1 2.461 2.564 2 2.247 2.564 3 2.033
2.564 4 1.819 2.564 5 1.605 2.564
6 1.391 2.564 7 1.177 2.564
8 0.963 2.564 9 0.749 2.564
10 0.535 2.564 11 0.321 2.564
12 0.107 2.564
73
John Jones purchased a residential fourplex on
May 1st this year. The DB is 350,000.
Depreciation Schedule
3 2.879 3.636 4 2.576 3.636 5 2.273
3.636 6 1.970 3.636 7 1.667 3.636

74
1st year depreciation 350,000 x 2.273 7,956
2nd year and after 350,000 x 3.636 12,726
75
Mr. OHara held the property for almost 10 years.
He purchased it on June 1st , he held the
property 7 months the first year and 9 more
years. He sold it December 31st this year. The
depreciable basis is 250,000. 1st Year 250,000
x 0.01970 4,925 Additional
years 250,000 x 0.03636 9,090 4,025 (9 x
9,090) 85,835
76
ADJUSTED BASIS AB PP BE CI - D Where AB
Adjusted Basis PP Purchase Price BE
Buying Expenses CI Capital Improvements D
Depreciation
77
Mr. Lawson purchased a fourplex for 490,000 and
buying expenses of 10,000. He has made capital
improvements of 60,000 and has taken 122,490 in
depreciation. His adjusted basis is AB
490,000 10,000 60,000 - 122,490
437,510
78
GAIN G SP - SE - AB Where G Gain SP
Sales Price SE Selling Expenses AB Adjusted
Basis
79
Rental sold his fourplex for 750,000 and with
expenses of 60,000, 6 for the agents and 2 for
costs, a total of 8. His gain is G 750,000
60,000 437,510 202,490
80
This gain is taxed at capital gain rates. Since
the property was held for more than a year the
property will receive long term capital gain
treatment. Be taxed at the 15 rate.
202,490 x 15 21,261