Real Estate Practice - Taxation
Who is "boot" taxable to?
"Boot" is taxable to the person receiving it. The property still needs to qualify as like kind for the exchange.
What is "flashing of mirrors."
"Flashing of Mirrors" is when any person (who is the center) is the hub of the exchange except the person wanting the exchange.
What is "up-leg"?
"Up-leg" is when the exchanger needs to find another property for the buyer because the buyer does not have a property to exchange.
What is a "Reverse Exchange"?
A "reverse exchange" is the replacement property is acquired before the property owner gives up the property. An exchange accommodation titleholder takes title to the property the exchanger wishes to acquire and holds the title until the sale of the exchange property can be arranged. The sales still must be made within 180 days.
What is a 1031 Exchange?
A 1031 Exchange is part of a federal tax law that allows for exchange of personal property as well as real property.
What is a 1031 exchange most commonly known as?
A 1031 exchange is most commonly known as a three-corner exchange or a three legged exchange.
What is a capital gain?
A capital gain is the gain on the sale of a capital asset that has been held for more than one year. Capital gains are taxed at preferential rates in order to encourage investments.
How often must a homeowner apply for the exemption and when must he be the owner of record?
A homeowner has to apply only once and must be the owner of record on or before January 1 (apply by February 15) and actually have occupied the property to claim this exemption for the upcoming year.
How many $7,000 exemptions can a homeowner have?
A homeowner may only have one $7,000 exemption at a time.
How many residences can one deduct mortgage interest and what is the Mortgage amount limited to in terms of basing the interest for write off.?
A person can have one primary residence and one secondary residence and be treated as home mortgage interest on mortgage amounts of up to $1 million only..
What is considered a "primary personal residence?"
A primary personal residence can be considered as: 1) Single family house 2) Houseboat 3) Mobile home 4) Trailer 5) motor home 6) trailer 7) Condominium 8) Cooperative housing. 9) a Unit in a multiple user swelling.
What is a primary residence vs a secondary residence?
A primary residence is one place that is occupied more than any other. All other residences are secondary residences.
What is a sales-leaseback?
A sales-leaseback is when property is sold with provisions for the seller to continue occupancy as a lessee.
What is a Supplemental Tax Bill?
A supplemental tax bill is due to a reassessment of the property as of the sale date.
What happens if a taxpayer fails to pay their taxes?
A taxpayer who fails to pay their taxes can have his property foreclosed on a tax lien to satisfy the taxpayers obligations.
What happens if a taxpayer has an impound account. How does his taxes get paid?
A taxpayer who has an impound account pays his taxes from his lenders account who sends the payment to the county.
What does a typical California Tax Bill include?
A typically California tax bill includes the following: A) An identifying parcel number with reference to the map page and property number or other description. B) A breakdown between land assessments and improvement assessments C) Tax exemptions such as a homeowners exemption D) A breakdown of the bonded indebtedness or special assessments E) The full amount of the tax F) Itemized or perhaps separate payments cards with the full tax equally divided into first and second installments.
What is different about a veterans exemption vs a regular homeowners exemption?
A veterans exemption increase with inflation. There are limits to the dollar amount of the property and for 2016 it was residential property valued up to $191,266 and for disabled veterans who possess income limited to $57,258 or less.
What is an installment sale?
An Installment sale is one where the investor can spread the tax gain on a sale over two or more years.
What is boot?
Boot is defined as all other unlike properties, cash, paper (trust deeds or notes), and personal properties (cars, boats, planes, paintings, jewels.
Does California have a favorable treatment of capital gains?
California does not have favorable treatment on capital gains and treats this income as regular income.
What is the difference between cash boot and mortgage boot?
Cash boot is the result of the balancing of equities. Mortgage boot is the difference between the loans on the conveyed property and the loans on the acquired property. The difference is called "debt relief". If the client assumes a mortgage larger than the one he conveys, then he has paid mortgage boot.
What is depreciation?
Depreciation is a method of accounting for the wear that results from the use of capital goods. Capital goods is a piece of equipment or a building and does not last forever.
Why is depreciation used?
Depreciation is used to reflect the replacement cost. The main reason for depreciation is to encourage investment in real estate and to reflect the real cost of property ownership.
What is a Documentary Transfer Tax?
Documentary Transfer Tax are adopted by counties when property is transferred from the original owners. This tax is currently $0.55 for each $500 or fraction thereof of consideration. Some counties also charge other taxes.
If a company works under government contracts, is rent an allowable expense?
If a company works under government contracts, that pay cost plus a fixed fee, rent is an allowable expense, but mortgage payments. Are NOT.
How old must a senior be and what other qualifications are there for a person to take advantage of property tax postponement?
In order to postpone payment of income tax a senior must be at least 62 years old with a household income of $35,500 or less and who have a 40% home equity. Also people who are blind or totally disabled and meet the income requirement are also eligible.
What is the June P. Carlton Case?
In this case, the exchanger received cash in the transaction. In a 1031 exchange, the exchanger can never receive cash or the right to cash.
Are special assessments for improvements generally tax deductible?
No special assessments for improvements are generally not tax deductible, however, they do increase the cost basis.
Can a personal residence be held for productive use in a trade or business as an investment?
No, a personal residence cannot be held for productive use in a trade or business as an investment. However, if the residence is turned into a rental property for a trade or business, you can use this property for a tax deferred exchange.
Does the two year occupancy rule mean that it has to be continuous?
No, a residence might have been used for 6 months as a personal residence and then coverted to rental but later the owner moves back into the house for 18 months. The two year rule will still apply.
Are leases considered long term liabilities?
No, leases are not considered long term liabilities and rent payments are tax deductible. Frequently, writing off total lease payments is better than depreciation.. A sale-leaseback would remove debt from a balance sheet.
Should Agents give legal or fiscal advice to clients?
No, since Agents are not CPAs or Attorneys, Agents should always refer the clients to the proper parties who have information about such things due to liability issues. Agents should refrain from providing tax advice.
Is vacant land considered a "residence"?
No, vacant land is not considered a residence.
Can you depreciate a personal residence?
No, you can only depreciate income property and cannot depreciate a personal residence.
How much of a gain on sale of a principal residence can be excluded from income?
On a gain on sale of a principal residence, and a seller who has lived at least two years of the five years can exclude up to $250,000 gain ($500,000 for joint filers meeting conditions).
How old must one be to take advantage of Proposition 60?
One must be at lease 55 or over as well as taxpayers who are severely and permanently disabled may transfer the current base year value of their present principal residence to a replacement,
What is the objective of Proposition 13?
One of the objectives of Proposition 13 is to keep property taxes as low as possible.
What is Prop 90?
Prop 90 is an expansion of Prop 60 and limits the purchase of the new home to the same county.. Prop 90 allows the purchase of a new home in a different county in California. There is no guarantee that this new county will accept Prop 90.
What is Proposition 13?
Proposition 13 was enacted in 1978 and states that newly acquired real estate or new construction will be assessed according to the fair market value (FMV) and taxed at a maximum tax rate of 1% (base levy). Also, assessed values of properties acquired before 1978 will be reduced to the amount shown on the 1975 tax roll.
What did Proposition 193 provide for?
Proposition 193 provided and subsequently extended the exemption from reassessment to persons who inherited property from a grandparent when both parents of the grandchild are deceased. The grandchild therefore kept the grandparent's assessment for the property taxes.
What is Proposition 58?
Proposition 58 provides that transfers of real property between spouses or domestic partners and transfers of the principal residence and the first $1,000,000 of other real property between parent and child are exempt from reassessment.
What are Real Property Taxes?
Real Property Taxes are "ad valorem" taxes which means according to value.
How are Real Property Taxes calculated?
Real Property Taxes rates are a percentage of the property's full cash value.
Give me the definition of "real property."
Real property can be: 1) Vacant land (unimproved real estate) 2) Improved real estate including farms, buildings, orchards etc. 3) Leases that have a remaining term of. 30years or move (would would include lease options). 4) Mineral and water rights if they are considered real property by the state.
What relief do senior citizens have regarding property tax postponement?
Senior have relief in the payment of property tax in that they may postpone the payment of taxes. Taxes are secured by a lien against the home in favor of the State of California. This program was discontinued and will be reinstated in 2016.
Computing gain is dependent on numerous adjustments? What are some of the adjustments that would be needed to come up to an adjusted basis in computing gain?
Some adjustments that might be made in order to come up to an adjusted basis in computing gain are: 1) Title insurance 2) appraisal fees 3) legal fees 4) Cst of capital improvement 5) Sales costs on disposition 6) LESS: accumulated depreciation.
Give some examples of non-residential properties.
Some examples of non-residential properties include industrial, commercial, office b uildings and other similar types of property.
What are some organizations that are partially or wholly tax exempt?
Some organizations that are partially or wholly tax exempt include nonprofit charitable organizations, churches, all government, and several nonprofit educational institutions. There may be some relief for some homeowners, veterans, senior citizens and renters.
What are some requirements of a delayed exchange?
Some requirements per IRC 1031 states that a delayed exchange have the following characteristics: 1) Must be identified within 45 days 2) must be completed no more than 180 days after transfer of the exchanged property.
What are special assessments?
Special assessments are levied for specified local improvements such as streets, sewers, irrigation, drainage, flood control and special lighting. Cities, counties and special districts may, by a 2/3 vote impose special taxes on a district
When are taxes assessed and paid?
Taxes are assessed and paid based on a fiscal year (July 1 - June 30) and are paid in two equal installments.
What is the "Adjusted Basis" of a property?
The "Adjusted Basis" of a property is the amount that the client has invested in the property for tax purposes. In other words, the adjusted basis is equal to the original basis + capital improvements made less depreciation taken.
What is the "basis" by gift?
The "basis" by gift is the donor's (gift givers) adjusted basis plus the gift tax paid not to exceed the fair market value at the time of the gift.
What is the "basis" by inheritance?
The "basis" by inheritance is generally the fair market value at the time of the owner's death.
What is the "basis" by purchase?
The "basis" by purchase is the price paid for the property as described.
What is the "buy-up" rule?
The "buy-up" rule is that the exchanger needs to trade up in value and put all equity dollars into the new property or properties.
What is the "entity" rule?
The "entity" rule is that how the exchanger holds property going into the exchange is the way the exchanger must hold the property coming out of the exchange.
What is the "investment property" rule?
The "investment property" rule is that no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business for investment.
What is the "like-kind-rule?
The "like-kind-rule" is that exchanges must observe how the property is carried. The property must be exactly the same in character or have the same nature. For real property, like-and property is simply any piece of real property exchanged for another piece of real property.
What is the No-choice" rule?
The "no choice" rule is that if an exchange qualifies as an exchange, it must be treated as an exchange. If the real estate transaction was structured as an exchange, the gain must be deferred.
What is the "no-loss" rule?
The "no-loss" rule is that if a real estate transaction qualifies as an exchange, a loss cannot be recognized. Losses must be deferred along with gains.
How often can the gain from a sale be used?
The $250,000 ($500,000) exclusion can be used once every two years. If one of spouses cannot use the exclusion, the other spouse can use the $250,000 exclusion but it cannot be greater than $250,000.
What does an 1031 exchange allow?
The 1031 Exchange allows the owner to delay taxes and thus have more money to invest in new property.
Explain the Contract method for determining value.
The Contract method for determining value is based on the buyer and seller determining the relative values of the improvements and and land and designating these values in the contract, deposit receipt, or escrow instructions. This determination must be "arms length" and reasonable. The owner should be prepared to justify the value in the event of an audit.
Will the County Recorders office record a conveyance for recording without the transfer tax paperwork?
The County Recorders Office will not record a conveyance without Transfer Tax Declaration. Documents subject to the tax must show the amount of tax paid on its face, it cannot be hidden.
Is the Documentary Transfer Tax negotiable?
The Documentary Transfer Tax is negotiable and parties can negotiate who pays the tax but generally in Northern California the buyer pays the tax and in Southern California, the seller pays the tax.
What is the Urban Agricultural Incentive Zone Act?
The Urban Agricultural Incentive Zone Act provides tax incentives for urban farms from 0.11 to 3 acres. The Williamson Act allows local governments to tax land based upon agriculture use rather than land value if the owner contracts to keep the land in agriculture use for a specified period
What does the Acronym NDFA stand for?
The acronym NDFA stands for November 1 - first installment due. December 10 - first installment considered delinquent February 1 - second installment due April 10 - second installment becomes delinquent
What is the amount of the Homeowner's Exemption in CA
The amount of Homeowners Exemption in CA is $7,000 from the full cash value
What is the amount of exemption for a Veteran and can he also take the $7,000 exemption also?
The amount of exemption for a veteran is $4,000 on the full cash value of their home. A veteran cannot take both the $7,000 and the $4,000. It's one or the other and usually would take the higher amount.
Explain the Appraisal Method for determining value.
The appraisal method for determining value is based on the services of a professional appraiser to appraise the building and the land.
Explain the assessed value method
The assessed value method is based on the county assessor' property tax statement which lists the full cash value of both the and and improvements. The value of improvements for depreciation purposes is the assessor determination of the part of the purchase price that represents the value of the improvements.
What is the depreciable basis?
The depreciable basis is defined as the original basis minus the value of the land.
What is the dollar amount of exemption under Prper 193?
The dollar amount of exemption under Prop 193 is $1,000,000 if single and $2,000,000 if a married couple.
What is the equation for computing the total gain?
The equation in calculating a gain is: Sales Price - Sales Cost - Adjusted Cost Basis = Total gain.
What would the equation of "flashing of mirrors" look like?
The equation of "flashing of mirrors" would look like S will transfer his property to B, B will transfer S's property to E, and E will transfer his property to B
What is the equation for original basis?
The equation of original basis is the purchase price + operation expenses + buying expenses. You cannot add non-deductible items such as impound accounts
What conditions are under Prop 60?
The following conditions relate to Prop 60: A) Both properties must be in the same county. B) Transferor must be at least 55 years old as of the date of the transfer. If married, only one of the parties need to be at least 55 but must reside in the residence C) The original residence must be eligible for homeowners exemption at the time of the sale D) The home must be of equal or lesser value than the old residence.
What forms of transfers changing the form of ownership are exempt under Proposition 13?
The forms of transfers that are exempt under Propositon 13 are: A) Changing the form of ownership (joint tenancy to community property) B) creation of revocable living trusts C) Co-signers for loan qualification D) Transfers of a principal residence from parent to child or child to parent.
What is the formula for computing depreciation?
The formula for computing depreciation is as follows: 1) Compute the original basis 2) Determine allocation between land and building 3) Compute the depreciable basis 4) Determine whether the property is residential or non-residential 5) Divide the depreciable basis by 27.5 (residential) or 39 years (non-residential)
What are some guidelines relating to installment sales?
The guidelines for an installment sale are: 1) The total tax to be paid on any one year must be reduced by spreading the payment amount and thus the gain over two or more tax years. 2) The seller pays tax in future years with cheaper future dollars. 3) The seller does not pay the entire tax until after receiving the entire amount of the purchase price. 4) The installment sales method is automatic unless the taxpayer elects not to have the installment sale treatment
What is the maximum increase a county may charge under Proposition 13?
The maximum increase a county may charge in the assessment value is up to 2% each year as long as the Consumer Price Index is not exceeded.
What is the original basis?
The original basis of a property is the sum of it's purchase price and buying expenses on an acquisition.
What is the penalty when a homeowner fails to notify the taxing authority of the termination?
The penalty for failing to notify the taxing authority of the termination may be the assessment plus a 25% penalty.
What is the purpose of Proposition 60?
The purpose of Proposition 60 was to encourage older people to move to less expensive housing without having to pay higher taxes because of reassessment on a new home.
What statement should be in the listing when a clients wants a 1031 tax deferred listing?
The statement that a clients wants to make a 1031 tax deferred exchange should be on the multiple listing service to convince the iRS that the clients intends to make a 1031 exchange from the beginning of the transaction.
Who gets the tax bill if the taxpayer does not have an impound account?
The tax bill goes directly to the taxpayer if he does not have an impound account.
What is the definition of "child" as it relates to reassessment?
The term "child" as it relates to reassessment includes a natural child (an child born of parents), stepchild or spouse of that stepchild, a son-in-law, daughter-in-law or a child that was adopted by the age of 18.
What are three methods for determining the value attributable to the land?
The three methods for determining the value attributable to the land is: 1) The assessed value method 2) The appraisal method 3) The contract method
The basis of the value of the property is based on how the property was acquired. What are the three ways one can determine how the property was originally acquired?
The three ways that a basis can be affected is by purchase, gift or inheritance.
What is the useful life of residential properties and non-residential property?
The useful life of residential properties is 27.5 years and non-residential property of 39 years.
How many parties are involved in a 1031 exchange?
There are three parties involved in a 1031 exchange. These three parties are: 1) The Exchanger - Person wanting to exchange 2 The Seller - person who wants to sell property and doesn't want to retain the property 3) The Buyer - A perso who wants the property of the exchanger.
What counties have accepted Prop 90 in California?
Those counties that have accepted Prop 90 in California are: A) Alameda B) Los Angeles C) Orange D) Santa Clara, E) San Diego F) Riverside G) San Bernardino H) San Mateo I) Ventura J) El Dorado
Who controls the money in a 1031 exchange?
To be a valid 1031 exchange, the exchanger cannot have control of the buyer's money. There must be an accommodating party (third party) who controls the buyer's money in the exchange.
Under Prop 193, what claim must be filed with the county assessor?
Under Prop 193, in order for persons who inherit property from a grandparent when both parents of the grandparents are deceased a claim must be filed that contains a written certification by the transferee that the parent or child is related to the transferor. The statement must also say that the property is the transferor;s principal residence.
When must the change in ownership statement be filed?
Usually the Change in Ownership Statment for a person acquiring an interest in property subject to local taxation must file this statement within 45 days of the recording or within 45 days of the transfer. Usually, escrow typically handles this task.
What must be filed within 45 days of the transfer?
Within 45 days of the property transfer, a change of ownership statement must be filed in the county assessor office. The sale of property will generally trigger an assessment.
Does California adopt the federal exclusion of $250,000/$500,000?
Yes, California still follows the Federal exclusion if it meets the Federal criteria.
Is rent on land deductible?
Yes, rent on land is tax deductible expense and improvements can be written off with depreciation deductions.
