Real Estate Principles unit 11 - Real Estate Taxation

Gift tax is payable when the total value of gifts to an individual in one year is more than

$14,000

the federal income tax exclusion on the profit of a sale of a home of principal residence is?

$250,000 for a single taxpayer, $500,000 for a couple -if the home was occupied for 2 of the last 5yrs -available every 2 yrs

veteran's exemption

- CA war vets may receive a $4k veteran's exemption on the full cash value of their homes - a person can't take both the homeowner's exemption and the veteran's exemption - a totally disabled veteran or their surviving spouse may be eligible for a higher exemption

The maximum tax rate on real property set by the board of supervisors can be nor more than

-1% of base value (.01) -plus an additional amount to pay for indebtedness or bonded indebtedness

What qualifies a manufactured home as real property?

-a building permit is obtained, -the home is attached to a foundation, -a certificate of occupancy is obtained, and -a document stating that the home is attached to a foundation is recorded.

The general rule is that real property and tangible personal property (except business inventory) is taxable. Property that is EXEMPT from taxation includes?

-intangible property (stocks and promissory note) -personal property and household furnishings -property owned by a government, unless the property is outside the jurisdiction of the public entity and was taxable before acquisition or it is new construction replacing property that was taxable when acquired -property used exclusively for ns like religious, charitable or hospital purposes -property owned by nonprofit organizations (private schools and colleges)

use tax

A charge imposed on the use or possession of personal property. Governments employ use taxes to accomplish two purposes. A use tax may be imposed to prevent someone from evading a sales tax by buying goods in a nontaxing state. Use taxes are also used to help defray the cost of public services associated with particular types of personal property.

tax sale

A court-ordered sale of real property to raise money to cover delinquent taxes. If delinquent residential property is not redeemed within 5rs it may be sold. After the applicable 5yr period, the tax collector has 2 yrs to sell the property. The former owner's right to redeem the property is in effect until the close of business on the last business day before a sale occurs.

gift tax

A federal tax applied to an individual giving anything of value to another person. It is the giver of the gift who is required to pay the gift tax. The receiver of the gift may pay the gift tax, or a percentage of it, if giver has exceeded his/her annual personal gift tax deduction limit. California's gift tax was repealed by voters in 1982.

FEDERAL GIFT TAX

A gift is a voluntary transfer by an individual of any type of property for less than full consideration. The giver is the donor; the recipient of the gift is the donee. No gift tax return need be made on a gift to one donee, in one year, of a present interest valued, as of 2013, at $14,000 or less. (A married couple could give $14,000 each, for a total of $28,000 to one donee in one year.) For every year after that, the maximum gift allowed before a gift tax return must be made will be $14,000 per donee plus an adjustment for inflation, although the exclusion will remain at $14,000 for 2014. If the gift is a future interest, a return always must be made.

capital asset

A long-term asset that is not bought or sold in the regular course of business.

straight-line method

A method of depreciation, also called the age-life method, that is computed by dividing the adjusted basis of a property by the number of years of estimated remaining useful life.

Homeowners over age 55 may be able to transfer a low assessed value to?

A new home (in the same county-prop 60; in another county prop 90). Severely disabled can transfer assessed valuation in the same manner, and improvements that enhance the usability of their home are not subject to reassessment.

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. CA = 7.5% generally -buildings removed from land by a seller may be subject to sales tax -buildings removed from land by a buyer are not subject to sales tax -when a business is sold, fixtures are subject to sales tax but inventory is not.

special assessment

A tax or levy customarily imposed against only those specific parcels of real estate that will benefit from a proposed public improvement like a street or sewer, as opposed to general tax on the entire community. -made on an ad valorem basis -appears as a separate entry on the property tax bill -lien on the property until paid

Supplemental Assessment

Additional "catch-up" property tax assessment following a sale or other reassessment event. -Jan 1 - May 31 = 2 supplemental assessments -June 1 - Dec 31 = 1 supplemental assessment

homeowner's exemption

Amount of property value of owner-occupied residence excluded from property taxation

benefit assessment

Amount owed by owners of property that is enhanced by the construction or renovation of improvements -not a deductible tax

inheritance tax

An "estate" tax imposed by the state on heirs for their right to inherit property. The tax is not levied on the property itself, but rather on the heirs for their right to acquire the property by succession or devise. Therefore, the rates or the deductions may vary depending on the degree of the relationship. (repealed)

installment sale

An income tax method of reporting gain received from the sale of real estate when the sales price is paid in installments, i.e., where at least one payment is to be received after the close of the taxable year in which the sale occurs. No down payment is required in an installment sale.

Morgan Property Taxpayer's Bill of Rights

California law effective January 1, 1994, to ensure that taxpayers are provided fair and understandable explanations of their rights and duties with respect to property taxation, prompt resolution of legitimate questions and appeals regarding their property taxes, and prompt corrections when errors have occurred in property tax assessments

Mello-Roos Community Facilities Act

California law that requires property owners benefiting from public improvements financed by bind issues to repay the bonds; requires notification to a prospective purchaser of lien assessments on the property

base value

For property tax assessment purposes, the full cash value of a parcel of real estate as of February 28, 1975, or the date of a subsequent sale or other reassessment event

related-party exchanges

IRC Section 1031(f) applies to exchanges between parties with a familial or business relationship. Related parties include spouses, brothers, sisters, ancestors such as parents and grandparents, and lineal descendants such as children and grandchildren; a corporation and an individual who owns more than 50% of the value of the stock of the corporation; and two partnerships in which the same person owns more than 50% of the capital or profit interests. If a taxpayer exchanges property with a related party, and either party disposes of the replacement property within two years of the exchange, the Section 1031 nonrecognition of gain does not apply. In other words, the transaction is treated as a sale by each party of the formerly owned property and the proceeds are taxed. The two-year rule does not apply if the property disposition occurs because of the death of the taxpayer or related party, or as a result of a compulsory or voluntary conversion of the property (such as a foreclosure or bankruptcy sale), or if the taxpayer can establish that one of the principal purposes of the exchange or subsequent disposition of the property was not the avoidance of federal income tax.

adjusted gross income

Income from all sources less deductions for taxes, depreciation, and other allowable deductions

ordinary income

Income that does not qualify for capital gains treatment

taxable income

Income that remains after allowed deductions from adjusted gross income.

certificate of redemption

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

A lien in the amount of tax due is placed on all assessed real property on?

Jan 1

the property tax year runs from

July 1 through June 30

the use of property assessments was expanded by?

Mello-Roos Community Facilities Act

Sam gave his friend Joe $15,000 for his tuition at Old Ivy, sending the money directly to the school. Must a gift tax return be filed?

No, because this is not considered a gift

county assessor

Official responsible for determining property values for ad valorem taxation purposes

capital gain

Profit earned from the sale of an asset, where the sales price was greater than the adjusted basis.

taxable gain from an exchange

Property received in an exchange has the same cost basis for the recipient as the property transferred, provided that no money or other additional consideration accompanies the transfer. Additional consideration, or boot, is reportable gain for tax purposes in the amount of the cash value of the boot received.

recovery property

Property that can be depreciated for income tax purposes, with the cost of the property deducted from income over a stated period. (investors)

reassessment event

Sale or other transaction, such as addition of improvements, that triggers a revaluation of property for tax purposes.

Sales and use taxes are the responsibility of the

State Board of Equalization

documentary transfer tax

Tax applicable to property transfers and affixed to the grant deed; varies from county to county, city to city. -the tax rate is $0.55 per $500 of the price paid for the property -no tax if under $100 (ex "love and affection" as consideration in a gift deed) -the consideration paid for the property excludes any preexisting liens or encumbrances (ex assumed loan)

tax bracket

Tax rate applicable to a taxpayer's taxable income.

FEDERAL ESTATE TAX

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

delayed exchanges

The Starker case set the precedent for delayed (nonsimultaneous) exchanges. Property is sold, with the proceeds held by a third party (called a qualified intermediary) until a new property is identified (within 45 days) and purchased (within 180 days). In a reverse-Starker, the replacement property is purchased before the relinquished property is sold. Caution: Strict legal requirements mean that legal/tax counsel should be involved in planning and execution of an exchange.

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.

basis

The dollar amount that the Internal Revenue Service attributes to an asset for purposes of determining annual depreciation or cost recovery, and gain or loss in the sale of the asset.

adjusted cost basis

The original cost basis of a property reduced by certain deductions and increased by certain improvement costs. The original basis determined at the time of acquisition is reduced by the amount of allowable depreciation or depletion allowances taken by the taxpayer, and by the amount of any uncompensated property losses suffered by the taxpayer

Recognizing that many older people on fixed incomes have trouble paying property taxes, the Property Tax Postponement Law was passed to allow?

The state recognizes that many older people on fixed incomes are property owners but have little funds to set aside for taxes. The Property Tax Postponement Law allows a senior citizen (person aged 62 or older) to postpone payment of taxes on his or her personal residence. Postponement also may be made by persons who are blind or disabled, as defined in the law. If the applicant is married, only one spouse need qualify. Houseboats and floating homes on which the property taxes are delinquent at the time of application are not eligible for postponement.

tax-deferred exchange (1031 exchange)

To be a tax-deferred exchange, as defined in Section 1031 of the Internal Revenue Code, the properties exchanged must be of like kind in nature or character. Most real property can be exchanged for other real property, such as an office building for vacant land. Property held for personal use cannot be exchanged for investment property; for example, a personal residence cannot be exchanged for a house that will be rented.

the Property Tax Year:

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

The Smith's sale of their residence is what type of event?

a reassessment event

a benefit assessment also may be called?

a special assessment

ad valorem

according to value

Proposition 13

added article 13 to CA constitution. It limits property tax rates to no more than 1% of full cash value. Increases in assessed value per year are capped at 2% or the percentage growth in the consumer price index (CPI) whichever is less

deductions

amounts on which income tax need not be paid. the home mortgage interest deduction from taxable income benefits homeowners.

tax credit

an amount by which tax owed is reduced directly

When all past due property taxes are paid, the county tax collector issues a:

certificate of redemption

property taxes are ad valorem taxes, which means they are?

charged in relation to the value of the property taxed

for 2016 what was not a deduction from a homeowner's gross income for federal purposes of federal income taxation?

depreciation based on a 39 year schedule

A deed may show on its face that which tax was paid?

documentary transfer tax

In California there is a state sales tax on

fixtures sold as part of a business

change in ownership statement

for property tax purposes, a change in ownership in real property is the transfer of a present interest in real property, including the transfer of the rights to the beneficial use thereof, the value of which is substantially equal to the value of the fee interest. -must be filed with the county recorder or assessor within 45 days of the date the transfer is recorded, if not recorded -within 45 days of the date of the change in ownership. penalty is $100 or 10% of the tax computed on the new base property value (whichever is greater)

If a manufactured home is treated as real property, it is subject to what taxation?

local real property taxation

vehicle license fee status

means that title to the manufactured home is registered with the Department of Housing and Community Development (HCD) (mobile home is personal property)

with respect to investment property, an investor can make use of

mortgage interest deductions from property income

To find the exemption full value

multiply the exemption amount by 4 to find its full value

when is a tax lien created?

on Jan 1, when the assessment roll takes effect for the next year, a lien is placed on all assessed real property in the amount of the tax due

what can serve as security for personal property taxes?

real property

property that can be depreciated for income tax purposes is called

recovery property

Tax delinquent real property not redeemed by the owner during the five-year statutory redemption period is deeded to the

state

the state of California collects what type of income tax?

state income tax

The rate of federal income tax paid depends on the taxpayer's:

tax bracket

The buyer of property at an auction by the tax collector receives a

tax deed

The purchaser at a tax sale receives a?

tax deed

assessed value

the dollar value of an asset assigned by a public tax assessor for the purpose of taxation

a gift is made when

when an individual voluntarily transfers property for anything less than its fair market value

Mario died in 2014, leaving only his separate property estate valued at $500,000. Must an estate tax return be filed?

yes