11. Real Estate Taxation

taxable income

Income that remains after allowed deductions from adjusted gross income.

Prop 13: Reassessment events are actions that trigger an ____________ in the assessed value.

Increase

What is the pneumonic for Property Tax year?

No Darn Foolin Around

Gift

Voluntary transfer by an individual of any type of property for less than full consideration

Prop 13: Qualifying Sale explained

When you sell the property to someone else, that will reset the property tax assessed value. You bought your house back in the day for $600 and now it's worth $2mil, but your taxes are still based on 600k (plus the little 2% increases). You sell it and I buy your house and now the property taxes reset for $2mil house.

***What is the documentary transfer tax rate?

.55 cents per $500 or fraction thereof and is only charged on "new" money.

Prop 13: There are 2 things that could trigger a reassessment:

1) Qualifying sale (sale of property) 2) Major Addition

You have a _____ year redemption period for not paying your property taxes.

5 years

Tax bracket

Tax rate applicable to a taxpayer's taxable income. Higher the taxable income, higher the rate.

Where do you file a Change of Ownership Statement with?

The County Recorder/Assessor

***Does a seller have to disclose the existence of Mello-Roos to the buyer?

Yes.

Assumed ________ amounts are exempt from transfer tax.

loan

Most loans allow a lender (bank) to call a loan due for non-payment of ________________.

property taxes; a bank will be upset if you don't pay your property taxes.

Adjusted gross income

the taxpayer's total income.

Documentary transfer tax example: The 1200 Via Loca house is sold for $687,575. An existing first trust deed of $524,000 is assumed by the purchaser. What amount of documentary transfer tax may be charged?

$687,575 - $524,000 = $163,575.00 $163,575 ÷ $500 = $327.15, rounded up to $328 $328 × $.55 = $180.40 transfer tax The $524,000 is "old" money so it is taken out of the equation. The "new" money is $163,575. "Fraction thereof" means round up.

Under Prop 13, the maximum tax rate statewide is a base rate of ________.

1%

properties exempt from taxes

1) Intangible property (stocks, promissory notes) 2) Personal property & household furnishings 3) Property owned by government 4) Churches, charitable, hospital purposes 5) property owned by nonprofits (private schools + colleges) Also, some boats + agriculture

Prop 13: The maximum increase in our assessed value per year is ___% per year.

2%

Proposition 13 capped the increase of assessed value at _____% per year. No matter what the value of the home does, if you're the owner you won't experience increases in property taxes over ______% per year.

2%

The government gives you a _____ year redemption period for non-payment of property taxes.

5 years

The redemption period for nonpayment of property taxes is ______ years.

5 years.

To take advantage of Prop 60 and Prop 90 you must be how old?

55 years old

Allowable deduction

A deduction is an expense that can be subtracted from an individual or married couple's gross income in order to reduce the amount that is subject to income tax. It is often referred to as an allowable deduction.

Tax Lien

A legal claim by a government entity to take an individual's property or income when their taxes are not paid in full

Sales tax

A tax imposed by the government at the point of sale on retail goods and services. It is collected by the retailer and passed on to the state.

Federal Estate Tax

A tax imposed on the transfer of property at death. It must be filed with the IRS within nine months of death, even if there is no tax due.

The second property tax installment is due and delinquent on (a)February 1st; April 10th. (b)November 1st; December 10th. (c)December 31st; June 30th. (d)March 1st; July 1st.

A. You must know the fiscal tax year for the state exam.Memorization Aid: No, Darn, Foolin, Around November 1: First installment due December 10, 5 PM: Delinquent date for 1st installment February 1: Second installment due April 10, 5 PM: Delinquent date for 2nd installment

***Mello-Roos Community Facilities Act

Allows developers go to investors and borrow money to fund the infrastructure in the area. The developer uses it to create streets, sidewalks, sewers, etc. THEN the developer will make all those homeowners in the area pay for the cost of the infrastructure through a Mello-Roos Bond.

Benefit assessment (local assessment)

Amount owed by owners of property that is enhanced by the construction or renovation of improvements. Examples: finishing of streets, construction of sewers, public utilities.

Homeowner's exemption

An amount of property value of owner-occupied residence excluded from property taxation. An owner-occupied residence, including a condominium or duplex unit, qualifies for a homeowner's exemption of the first $7,000 of full cash value.

Annual property tax (formula)

Annual property taxes = (assessed value) x (tax rate) = $400,000 x 1.25% = $5,000 per year

Recognizing that many older people on fixed incomes have trouble paying property taxes, the Property Tax Postponement Law was passed to allow (a) senior citizens to postpone payment of property taxes. (b) blind or disabled people to postpone payment of property taxes. (c) both (a) and (b) are correct. (d) certain individuals to postpone property taxes on houseboats and floating homes.

C.

Real property taxes become a lien on (a)November 1st. (b)February 1st. (c)January 1st. (d)July 1st.

C. january 1

Tax delinquent residential real property not redeemed by the owner during the five year statutory redemption period is deeded to the (a)city. (b)county. (c)state. (d)school district.

C. state

Veteran's exemption

California war veterans may receive a $4,000 exemption on the full cash value of their homes.

A _________________ must be filed with the Assessor within 45 days of transfer

Change of Ownership Statement

The TAX RATE in your area is determined by the County Board of _______________.

County Board of Supervisors

Which of the following is true regarding current federal estate tax law? (a) The American Taxpayer Relief Act of 2012 established a federal estate tax exemption of $5 million per person, indexed for inflation. (b) The exemption was $5.25 million for 2013 and is $5.34 million for 2014. (c) The exemption is reduced by any large gifts (those subject to gift tax) made during the decedent's lifetime. (d) All of the above

D. The American Taxpayer Relief Act of 2012 established a federal estate tax exemption of $5 million per person, indexed for inflation. The estate is taxed at a 40% rate on any estate value over that amount. The exemption was $5.25 million for 2013 and is $5.34 million for 2014. The exemption is reduced by any large gifts (those subject to gift tax) made during the decedent's lifetime.

***The second installment of property taxes are due on _____________, and delinquent after _________________.

February 1; April 10

Proposition 90

Homeowners at least 55 years old can transfer their low assessed value to a new home in another county if it is allowed by the new county.

Proposition 60

Homeowners at least 55 years old can transfer their low assessed value to a new home within the same county (generally one-time).

Proposition 13

In 1978, California voters passed this measure that sharply cut property taxes.

_____________ is the lien date for property taxes.

January 1

***The tax fiscal year is from _________ - _________.

July 1 - June 30

A developer can off load the cost of the infrastructure onto residence by floating a ___________.

Mello-roos bond

Does the real estate licensee serve as a tax advisor?

NO. It is best to be familiar with with taxes in real estate transactions, but you can not act as a tax advisor.

Shouldn't February be the first installment and November be the second installment (according to the calendar year)?

NO. The tax year is different than the calendar year.

***No Darn Foolin Around

November 1 December 10 February 1 April 10

***The first installment of property taxes are due on _______________, and delinquent after _______________.

November 1; December 10

In CA, why is the increase in property taxes is capped at 2% per year due to Prop 13?

Over the past 5 years, CA's property values have increased in some areas 50%. Most people would not be able to afford our real estate if property taxes increased as fast as the property value goes up.

The entity in California that collects and administers sales tax is called the _______________.

State Board of Equalization

The legal theory that says the buyer of a business is liable for the seller's back tax.

Successors liability

Documentary Transfer Tax

Tax that is paid to the county every time you transact real estate within the county (transfer deed) and is affixed to the grant deed; varies from county to county, city to city.

Who do you get a tax clearance receipt from?

The Board of Equalization

Who does the buyer contact to make sure there is no back tax?

The Board of Equalization

Successor's liability

The buyer of a business is liable for the seller's back sales tax.

If you are buying a business (like a restaurant) and the business had witheld sales tax who is liable?

The buyer.

Depreciation

The decrease in the value of an asset when computing property value for tax purposes. It can also be a loss in the appraised value due to physical deterioration. The latter type of depreciation is curable when it can be remedied by repair or addition to the property, and incurable when there is no economical remedy.

Over time the assessed value has no correlation with the market value. Why?

The market value increases over time.

How would the government know if you've made a major addition?

Through permits. This will reassess property taxes and assessment value.

Cities sometimes charge an additional transfer tax (so they can get more money). I this charged on top of the county transfer tax?

Yes.

Property taxes are based on the assessed value, which in CA has nothing to do with the market value of the property based on Prop 13. Explain.

You're driving down a street in LA where all the houses are worth $7 million. One guy on one side of the street might be paying property taxes on his house like it is worth $7 million because he just bought it. Another person on the other side of the street is paying property taxes on it like it is only worth $1 million because they bought it so long ago.

Special Assessments

a tax that can be imposed on real property for a specific local purpose, such as street repair, sidewalks, etc. They are liens on property until paid.

Tax consequences with respect to real estate should be known (a) prior to acquisition. (b) at time of sale. (c)a t close of escrow. (d) three months after taking possession.

a. Virtually all important decisions affecting tax liability must be made before a transaction in negotiated. At any other time, it may be too late.

The maximum nontaxable amount that can be given as a gift to one donee, in one year, is currently (a) $14,000. (b) $10,000. (c) $5,000. (d) $1,000.

a. $14,000 Anything over $14,000 will have a gift tax

Which of the following is considered an ad valorem tax? (a)real property tax. (b)unit tax. (c)use tax. (d)death tax.

a. real property tax

What does 'ad valorem' mean?

according to value

Property taxes are an "_______________" tax -- according to value

ad valorem

capital assets

all property except business inventory or other property held for sale in the ordinary course of one's business. Capital assets include a personal residence, land held for investment, stocks, bonds, and machinery and equipment used in business.

Property Tax Postponement Law

allows a senior citizen (person aged 62 or older) to postpone payment of taxes on a personal residence.

A taxpayer who disagrees with assessed value may __________ their assessed value with the Assessment Appeals Board within the Assessor's office.

appeal

We pay property taxes according to the __________ of our property.

assessed value

The county ____________ determines your assessed value. He wants to know if you sold your property. A _________________ statement must be filed with the county Assessor within _______ days of the transfer.

assessor; change in ownership statement; 45

A manufactured (mobile) home can be either personal property or real property. As personal property, a manufactured home is subject to (a) local property taxation. (b) vehicle license fee status. (c) special tax assessment status. (d) supplemental tax status.

b) vehicle license fee status Generally, if a home is lifted off its foundation for relocation, it has to be registered with the HCD and is considered personal property. Once it is put back on its foundation it is considered real property once again and needs to be recorded. Manufactured (mobile) homes can be either personal property or real property. As personal property, a manufactured home is subject to vehicle license fee status. Vehicle license fee status means that title to the manufactured home is registered with the Department of Housing and Community Development (HCD). If treated as real property, a manufactured home is subject to local real property taxation.

If a property owner believes that the assessed value on his or her property has been set too high, the owner could file a request to seek a reduction from the (a)County Board of Supervisors. (b)Assessment Appeals Board. (c)Tax Collector. (d)State Board of Equalization.

b. Assessment Appeals Board

The _________ is liable for the seller's back sales tax under successors liability.

buyer

Which of the following can a property owner expect after sewer lines are installed in front of his/her property? (a) supplemental assessment (b) general assessment (c) special assessment (d) All of the above

c.

The California sales tax is a(n) (a) ad valorem tax. (b) tax paid on real estate. (c) tax paid on tangible personal property. (d) tax paid on all personal property.

c. The California State Sales Tax is imposed upon retailers for the privilege of selling tangible personal property at retail.

Who's responsibility is it for installing streets, sidewalks, and infrastructure in an area? a) the city b) the county c) the developer d) the state

c. The developer

In computing transfer tax, the consideration paid for the property excludes (a) the down payment. (b) the deposit. (c) any preexisting liens or encumbrances. (d) any property taxes due.

c. any preexisting liens or encumbrances that were not removed by the sale (such as an assumed loan).

What will the Board of Equalization give the buyer if everything is okay?

clearance receipt

If you are buying a business and want reassurance there are no back sales tax, the buyer will contact the State Board of Equalization. They would then give you something called a __________________.

clearance receipt or tax clearance.

A _________________ shows that the seller is clear of back sales taxes.

clearance receipt.

The ASSESSED VALUE is determined by the county _____________.

county assessor

Certification of redemption

issued by the county tax collector when all past due amounts have been paid.

How does a benefit assessment differ from a special assessment?

its tax base is only the properties benefited.

Mostly likely that 5 year period will never come because the __________ will invoke an acceleration provision before that.

lender

Over time the gap between the assessed value and the ____________ value will increase dramatically.

market value; Market price might inflate 6% each year; property taxes stay at 2%

____________ of the home inflates over time; ____________ of the home stays the same.

market value; property taxes

The documentary transfer tax is only charged on "______" money.

new money; It does not include any loan being assumed.

Would you have mello-roos in older or newer communities?

newer communities where the infrastructure was recently built.

ordinary income

ordinary income are wages, tips, salaries, and commissions. Ordinary income is income that does not qualify for capital gains treatment.

Federal Income tax are said to be _________________.

progressive; meaning the more you make the more you pay.

Prop 13: The only reason you would discuss assessed value would be if you are discussing ________________, because it is no relation to the market value.

property taxes

A ____________ and a _______________ can trigger a reassessment.

qualifying sale and a major addition

Morgan Property Taxpayers' Bill of Rights

requires the county assessor to allow inspection and copying of documents related to an assessed property, including an auditor's work papers.

The sale of real estate is not subject to _________ tax.

sales tax; It is a TRANSFER tax.

The purchaser (highest bidder) at a tax sale receives a _______ deed.

tax

basis

the basis of property generally is its cost when acquired.