Real Estate 100 - Chapter 14 - Introduction to Taxation

What is a "book sale."? Chapter 14

1. A "book sale" by the county tax collector's office is not a real sale, but rather notices the owner that the taxes haven't been paid. The owner still owns the real estate, but his name is entered into a delinquent account book for which the owner has 5 years in which to redeem the property by paying the back taxes, interest and other penalties.

What is a gift tax and who levies the tax? Chapter 14

1. A gift tax is the tax on a voluntary transfer of property from the owner, called the donor, to the receiver, called the donee. 2. The federal law allows a tax free gift (as of January 2014) of $14,000 per donee per year. This amount will increase each year.

When can a person who has purchased a Tax Deed property get title insurance? Chapter 14

1. A person, under current title insurance policies, can acquire title insurance after a period of one year from purchasing a tax deed property

What kinds of taxes must be collected when a real estate salesperson is hired by a broker and acts as an employee instead of an independent contractor? Chapter 14

1. A real estate salesperson who works for a broker as an employee rather than as an independent contractor may have to pay unemployment insurance fees, worker's compensation fees and social security taxes .

What rule is there regarding the use of personal property in a business? Chapter 14

1. As a general rule, only tangible personal property used in business is subject to taxes. Personal property taxes are divided into secured and unsecured categories depending on whether the owner of the personal property owns the real estate where the property is located. So, unsecured taxes mean you pay taxes on business fixtures and secured taxes mean you DO own the property and pay tax on that?

Who are exempt from Property Taxes? Chapter 14

1. Certain owners of property are exempt from property taxes because of special laws. They are: A. Government owned real estate such as public buildings, parks and school sites. B. Some churches and religious properties C. Some special exemptions for homeowners, veterans and senior citizens.

Can the delinquent taxes be paid in installments? Chapter 14

1. Delinquent property taxes can be paid in 5 annual installments as long as the current taxes are paid at the same time.

What are documentary transfer taxes? Chapter 14

1. Documentary transfer taxes of $1.10 per $1,000 is levied if the property is being transferred on the full price of the property if all cash or a new loan. 2. If on an assumed loan, the transfer tax is only levied on the equity being transferred. 3. If the property is in an unincorporated area, all the tax goes to the county where the property is located. 4. If the property is located in an unincorporated city, the city and county divide the tax proceeds.

What is the delinquent charge for failure to pay the first installment, second installment or both? Chapter 14

1. Failure to pay the 1st installment or the 2nd installment each separately would be a 10% penalty added to each installment. Failure to pay both installments would result in a penalty of 10% for both plus an additional charge.

What are some major income advantages for investment property owners at this time? Chapter 14

1. First of all, this may change based on President Trumps' priorities with regards to INVESTMENT PROPERTY. 2.Interest on real estate loans and property taxes paid are deductible against rental income earned on the property. 3. Depreciation allowed over the useful life of the property. 4. Repairs, maintenance, management insurance and other operating expenses are also deductible. 5. May be able to do a tax deferred exchange (1031 Starker) but may be in jeopardy in Congress 6. An installment sale may be allowed to reduce tax liability as you are only receiving a portion of the gain over a period of time. This may also be in jeopardy in Congress

What are the major advantages of Income Tax Laws for homeowners? Chapter 14

1. First of all, this may change based on president Trump's priorities! 2. Interest paid on real estate loans is deductible against personal income to reduce tax liability, subject to interest limitations. 3. Property taxes paid are also deductible against personal income. 4. Capital Gains are not charged against primary residences up to $250,000 for singles and $500,000 for married couples who file a joint return. RDPs would fall under the single category. Qualifications include being the principal residence for at least 2 out of 5 years prior to sale. This full exclusion can be used only once each two years. 5. If the two year rule is not met and is due to a job change, major illness or unforeseen circumstances, then a pro-rata formula can be used based on the number of years I.e., 18 months/24 months - 75% can be used.

What happened to senior citizen's property tax postponement? Chapter 14

1. For senior citizens, blind or disabled persons, previously they were allowed to postpone the payment of the property taxes. This was suspended in Feb 2009. Counties can implement a VOLUNTARY tax postponement program for properties located within each county under Chapter 369, Statutes of 2011 if they want to.

What happens after 5 years if the delinquent property taxes are not paid. Chapter 14

1. If the delinquent property taxes are not paid after 5 years, the delinquent property is deeded to the state and the owner loses title. If the state still holds title, the owner still has the right of redemption. If the state has sold the property, the owner no longer is able to redeem his property.

What happens to the exemption if the veteran passes away? Chapter 14

1. If the veteran passes away the exemption is extended to the unmarried surviving spouse, registered domestic partner or pensioned father or mother. There are special rules that exist for veterans who are disabled incurred in the military.

What happens if there is/was a change in ownership since March 1, 1975 under Proposition 13? Chapter 14

1. If there were any change in ownership such as a sale, gift or an inheritance, the new owner's full cash value for tax purposes shall be the sales price or value of the property as of the date of transfer.

What is the current property homeowner's tax exemption in California? Chapter 14

1. In California, the current property Homeowner's Exemption is $7,000. In order to claim this exemption, the homeowner must have been the owner and in residence on or before January 1 and must file for the exemption with the assessor office by February 15th. If that deadline is missed, the person can file by December 1st and get an exemption of $5,600.

Who levies Income Taxes? Chapter 14

1. Income taxes are levied by the Federal Government and by the State of California. The income tax is a progress tax in that the tax rates increase as the income levels being taxed increase.

Who pay inheritance Tax in California? Chapter 14

1. Inheritance taxes in California has been eliminated.

What is Proposition 13? Chapter 14

1. On June 6, 1978, voters of California passed Prposition 13, the Jarvis-Gann initiative which limited real property taxes to one percent of the full cash value of the real property plus an amount for local assessments and bonds.

How are property taxes levied in California? Chapter 14

1. Property taxes are levied in California on an "ad valorem' basis or according to the value. Owners of property valued higher pay higher property taxes

When do property taxes become a lien on the property? chapter 14

1. Property taxes become a lien on the property January 1,xx preceding the fiscal tax year. (NOTE: the fiscal tax year would have started July 1,xx to June 30, xx

What is Proposition 60? Chapter 14

1. Proposition 60 allows homeowners 55 years of age or over to transfer their base year property tax value to another home of equal or lesser value in the SAME COUNTY and keep the low assessment they had.

What is Proposition 90? Chapter 14

1. Proposition 90 allows the transferring of their base year property tax value to another home if a new home is purchased in ANOTHER COUNTY, but only if that county's Board of Supervisors chooses to apply Proposition 90.

Can RDPs file a joint income tax return? Chapter 14

1. Registered Domestic Partners CANNOT file joint income tax forms for federal taxes.

When would sales and use taxes be paid during a transaction? Chapter 14

1. Sales and use taxes may be paid during the sale of a business opportunity or a mobile home. In such circumstances, the broker is responsible for seeing that the escrow instructions are correctly drafted to account for the tax liability.

What's re some income tax rules for HOMEOWNERS under the Real Estate Tax Reform Act of 1986, Tax Revenue Act of 1987 and Taxpayer Relief act of 1997? Chapter 14

1. Some Real Estate Tax Rules for HOMEOWNERS from 1986, 1987 and 1997 are: A. Mortgage interest deductions for acquisition debt up to $1 million on ALL combined mortgages on first and second residence. NO INTEREST DEDUCTION IS ALLOWED FOR THREE OR MORE PERSONAL USE HOMES. B. For REFINANCING of an existing home, the remaining loan balance on acquisition loan(s) plus $100,000 will be the maximum refinance loan allowed if the homeowner wishes to deduct all the interest as a qualified home loan. C. $250,000 singles and $500,000 joint filing married couples exemptions still valid. D. Installment sales treatment is still allowed for homeowners.

What are some income tax rules for INCOME PROPERTY OWNERS under the Real Estate Tax Reform Act of 1986, the Tax Revenue Act of 1987 and Taxpayer Relief act of 1997? Chapter 14

1. Some Real Estate Tax Rules for INCOME PROPERTY OWNERS from 1986, 1987 and 1997 are: A. Depreciation on buildings and improvements is 27.5 years for residential rental properties and 39 years on non residential properties. Straight line method MUST be used. B. Rental property mortgage interest is still fully deductible with no dollar limits placed. However, any tax loss created by interest and depreciation deduction falls under the passive tax loss rules. C. Real estate rentals are considered "passive" investments and produce either passive income or passive loss. PASSIVE REAL ESTATE LOSS can only be used to offset other passive income (rental income) and CAN'T be offset by portfolio income such as salaries, commissions, profits, interest and dividends. D. Special $25,000 exception to the passive loss rules if: 1. Individual owner of 10% or more interest in the rental real estate. 2. Is actively involved in the management (makes key decisions) 3. Has modified adjusted gross income of $100,000 or less 4. If 1,2,3 are met, he can use up to $25,000 in passive losses from real estate to offset active or portfolio income such as salaries and interest, after first offsetting passive income. 5. If the rental property owner's modified AGI exceeds $100,000, the $25,000 is reduced $1 for every $2 above the $100,000. Any passive losses can be carried over to the next year. 6. 1031 Exchanges still valid at this time. 7. Installment sales treatment for real estate INVESTORS is still allowed. However, Installment sale treatment for real estate DEALERS HAS BEEN ABOLISHED.

What are special assessments and name a few.? Chapter 14

1. Special Assessments are not property taxes, but help pay for specific improvements for streets and sewers etc. Some of these are: 1. Street Improvement Act of 1911 - used by cities and counties for street improvement. Either the owners can pay in full or if a bond is passed, they can pay their pro rata share over time. 2. Mello-Roos Community Facilities Act of 1982 - this is used to finance public services in newly developed areas for waste treatment plants, parks, schools, fire stations. 3. These assessments may be high and should be made known to any new buyer before a purchase takes place. 4. Failure to pay the special assessments can result in loss in the property owner's title I.e., similar to a tax sale.

When is the Notice of Intent to Sell published by the tax collector? Chapter 14

1. The "Notice of Intent to Sell is published by the county tax collector if an owner fails to pay real property taxes. This notice is published on June 30, xx

When is the first installment of the property tax due? Chapter 14

1. The first installment of the property tax is due November 1, xx and is delinquent on December 10,xx

What are public auctions of delinquent properties? Chapter 14

1. The sale of the properties that are delinquent can be sold at a public auction by the county tax collector. In order to do this, the county tax collector must first obtain permission from the local board of supervisors AND the state controller. ALL TAX SALES ARE FOR CASH ONLY. The successful bidder receives a TAX DEED.

When is the second installment of the property tax due? Chapter 14

1. The second installment of the property tax is due Feb 1, xx and delinquent on April 10, xx

Who are involved in property taxes and what are their functions? Chapter 14

1. There are many groups involved in property. here are the names and specific duties: A. County BOS - Established county budgets and sets county property tax rates to the max allowed by law. B. City Council members - Establish city budgets and set city property tax rates up the max allowed by law. C. City or county auditor - Maintains the tax rolls D. City or county assessor - Appraises property for tax purposes E. City or county tax collector - actually collects the taxes F. Local Board of Equalization ( or an appeals tax board) - hears appeals from citizens who believe they have been taxed unfairly. G. State Board of Equalization - Audits and offers guidance to local taxing agencies.

What other property tax exemptions are there for other types of properties? Chapter 14

1. There are property tax exemptions for owners who use the land for timber, growing crops, young orchard trees, grapevines less then three years old as well as churches and non-profits. See your tax professional for details.

Under FIRPT how much tax needs to be withheld for foreign investors in regards to Federal and State Taxes? Chapter 14

1. Under FIRPT ( Foreign Investment in Real Property Tax Act) the federal government requires at 10% of the sales price to be withheld and the State requires 3 and 1/3 percent for state income taxes if the person is a foreigner or a resident of another state. DUE TO A RECENT LAW, THE STATE OF CALIFORNIA ALSO ALLOWS THE STATE TO WITHHOLD 3 AND 1/3 PERCENT OF STATE INCOME TAXES FOR CERTAIN TYPES OF INVESTMENT PROPERTY

What happens if there were any improvements to the home under Proposition 13? Chapter 14

1. Under Proposition 13, any additions or improvements to the existing home would be valued separately and these amounts would be calculated separately from the main house. Each year the main house would increase by 2% in taxes (on it's tax base) and then the improvements would increase by 2% (on the improvement base). Both of these new figures would be added together for the total of the new taxes.

What would be the value under Proposition 13 for new construction? Chapter 14

1. Under Proposition 13, new construction since March 1975 full cash value for tax purposes is the real estate value at the time of completion plus the inflation factor of 2% per year to the present tax year.

What transfers exclusions are there under Proposition 13 at this time? Chapter 14

1. Under Propositon 13, at this time, transfers made between spouses and RDPs are exempt from the reassessment under Prop for the following: A. Changing title from joint tenancy to community property B. Deed from one spouse or partner to another C. Deeding property to a living trust D. Transfer of a principal residence worth $1 million or less from a parent to a child(ren). E. Replacing a property due to government eminent domain F. Replacing a property due to a disaster.

What were the terms under Proposition 13? Chapter 14

1. Under the terms of Proposition 13, if there were no change in ownership since March 1, 1975, the 1975 value shall be the initial full cash value. To this figure, the assessor is allowed to add the inflation factor of 2% per year, compounded to arrive at full cash value for the present year.

Is there a veteran's homeowner's tax exemption? Chapter 14

1. yes, a veteran would get a homeowner's tax exemption of $4,000 on the full value of the property. However, he cannot claim both the $7,000 and the $4,000 exemption. He would only be entitled to the higher of the two. If the vet has another property, he can apply the $4,000 but, be warned that there are restrictions on his net worth at the time which would affect the allowance of the second exemption.