Florida Real Estate Principles, Practices & Law 38th Edition Linda L. Crawford Copyright © 2015 Kaplan, Inc. All rights reserved.

Chapter 18 Taxes Affecting Real Estate

©2015 Kaplan, Inc. City and County Property Taxes Taxation process –Ad valorem, according to value –Levied for calendar year –Paid in arrears –Tax schedule Just value – objective valuation –Assessed value Established value for tax purposes –Assessment (TRIM) notice

Protest Procedure Contact county property appraiser Appeal to value adjustment board –2 county commissioners –1 school board member –2 citizens of county Litigation –File suit against property appraiser and tax collector ©2015 Kaplan, Inc.

Tax Districts: Budgets and Tax Levy City, county, school board, or special tax districts Combine individual department budgets into final budget Property taxes used to pay for the majority of budgeted local services ©2015 Kaplan, Inc.

Exemptions from Property Taxes Immune property –Government properties are not assessed and not taxed Exempt property –Churches and nonprofit organizations –Subject to taxation but released from taxes Partially exempt –Taxed on only part of assessed value ©2015 Kaplan, Inc.

Homestead Tax Exemption To qualify for homestead exemption –Permanent legal residence in Florida Can only claim one homestead –Hold title to the property –January 1 Legal title Residence –First year File with county property appraiser on or before March 1 ©2015 Kaplan, Inc.

Applicable Homestead Exemption First $25,000 of assessed value is exempt for all tax districts Next $25,000 of assessed value is taxed for all districts Third $25,000 of assessed value is exempt for city and county taxes but not school board taxes ©2015 Kaplan, Inc.

Taxable Value Formula Taxable value –Assessed value minus exemptions ©2015 Kaplan, Inc.

Homestead Exemption Example A homestead is assessed for $35,000. What is the taxable value? $35,000Assessed value - 25,000Original exemption $10,000 Taxable value ©2015 Kaplan, Inc.

Another Example A homestead is assessed at $60,000. What is the taxable value for city taxes? $60,000 Assessed value - 25,000 Original exemption - 10,000* Additional exemption on part of assessed value above $50,000 $25,000Taxable value * Additional exemption does not apply to school board taxes ©2015 Kaplan, Inc.

Final Example A homestead is assessed for $125,000. What is the taxable value for county taxes? $125,000Assessed value - 25,000 Original exemption - 25,000* Additional exemption $75,000Taxable value *Additional exemption does not apply to school board taxes ©2015 Kaplan, Inc.

Additional $500 Exemptions Surviving spouse Legally blind Non-veterans who are totally and permanently disabled ©2015 Kaplan, Inc.

Disabled Veteran Exemption At least 10 percent disability by military service-connected misfortune Additional $5,000 exemption from homestead property Totally & permanently disabled veterans are totally exempt ©2015 Kaplan, Inc.

Other Exemptions Age 65 and older Quadriplegics Cumulative homestead tax exemptions ©2015 Kaplan, Inc.

Florida’s Green Belt Law Agricultural land –Assessment based on use –Not on highest and best use –Protect farmers –Requires annual classification ©2015 Kaplan, Inc.

Save Our Home Amendment to Florida Constitution Limits increases to assessed value for homesteads 3 percent annually, or CPI change, whichever is lower ©2015 Kaplan, Inc.

Save Our Home Example In 2013, a homestead was assessed for $100,000. During 2013, the CPI rose 2%. What is the maximum the assessed value can be in 2014? $100,000 x 2% = $2,000 $100,000 + $2,000 = $102,000 Maximum assessed value for 2014 is $102,000. ©2015 Kaplan, Inc.

Tax Rates Tax rates are expressed in mills Mill—one-thousandth of a dollar (or one-tenth of a cent =.001) –10 mill cap (city, county, or school board) –Millage rate ©2015 Kaplan, Inc.

Annual Property Taxes Due Formula Taxable value multiplied by Tax rate equals Annual property taxes due ©2015 Kaplan, Inc.

Property Tax Example A widow owns a homestead that is assessed for $90,000. The city tax rate is 7.6 mills; the county rate is 8.2 mills; and the school board rate is 9.1 mills. What will the owner owe in property taxes? ©2015 Kaplan, Inc.

Property Tax Solution City & County Taxes $90, mills - 25, mills - 25, mills $39,500 X.0158 $ School Board Taxes $90, , $64,500 X.0091 $ ©2015 Kaplan, Inc. $ $ = $1,211.05

Property Tax Savings Tax exemption multiplied byTax rate equalsTax savings ©2015 Kaplan, Inc.

Property Tax Savings Example A widow owns a homestead that is assessed for $90,000. The city tax rate is 7.6 mills; the county rate is 8.2 mills; and the school board rate is 9.1 mills. What does the owner save in property taxes due to exemptions? ©2015 Kaplan, Inc.

Property Tax Savings Solution City & County $25, , $50,500 x.0158 $ School Board $25, $25,500 x.0091 $ ©2015 Kaplan, Inc. $ $ = $1,029.95

Special Assessments One-time taxes –For public improvement that benefits the property owner Street paving Sewer lines Not ad valorem taxes –Levied on a front-foot basis or per hookup basis ©2015 Kaplan, Inc.

Street Paving Special Assessment Example The city is paving an unpaved street. The property has 100 feet that face the street. The paving cost is $30 a linear foot, and the city will pay 25% of the total cost. What will be the special assessment for this property? ©2015 Kaplan, Inc.

Special Assessment Solution 100 feet x $30 per foot = $3,000 Property owners’ share = 75% –100% - 25% (city share) = 75% $3,000 x 75% =$2,250 $2,250 ÷ 2 =$1,125 –Only pay to pave one side of street Special Assessment = $1,125 ©2015 Kaplan, Inc.

Nonpayment of Real Property Taxes Property tax lien is superior to all other liens on real property –Tax certificates issued –Bid interest rate 18% maximum rate –Property owner owes taxes plus accrued interest –Public tax auction ©2015 Kaplan, Inc.

Federal Income Taxes: Principal Residence Deductions if taxpayer itemizes –Mortgage interest Principal and second home –Property taxes Principal and second home –Interest on home equity loan Loans up to $100,000 –Mortgage origination (points) Refinance points are deducted over life of loan ©2015 Kaplan, Inc.

Additional Advantages of Homeownership First-time homebuyers –Penalty-free withdrawal up to $10,000 from IRA for down payment Exclusion of gain from sale of a principal residence –Up to $250,000 of gain excluded ($500,000 for married couples filing jointly) ©2015 Kaplan, Inc.

Sale of Real Property Capital gain is profit from the sale of real property Taxable gain is determined by –Amount realized from sale Sale price less expenses of sale –Adjusted basis Owner’s original cost plus expenses of purchase and capital improvements –Capital gain Amount realized less Adjusted basis ©2015 Kaplan, Inc.

Example of Sale of Real Property A homeowner sold his house for $125,500 and paid $9,410 for broker’s commission, doc stamps on the deed, and owner’s title insurance. The owner’s original cost was $95,000 with $4,750 in purchase expenses. The owner made capital improvements of $12,000. What were the owner’s amount realized from the sale, adjusted basis and capital gains? ©2015 Kaplan, Inc.

Solution $125,500 - $9,410 = $116,090 amount realized from the sale $95,000 + $4,750 + $12,000 = $111,750 adjusted basis $116,090 - $111,750 = $4,340 capital gains ©2015 Kaplan, Inc.

Purchase from Foreign Sellers Purchase of U.S. real property from foreign sellers –Aim to prevent foreign sellers from avoiding paying taxes –IRS requires buyers to hold 10 percent of gross sale price –Buyer must report the purchase and pay the IRS the amount withheld ©2015 Kaplan, Inc.

Capital Gains and Losses Sale of capital assets –Sold for more than its basis is a capital gain –Sold for less than its basis is a capital loss Capital losses can be used to offset capital gains for tax purposes –Loss on the sale of a principal residence is NOT a capital loss Capital gains are taxed at the applicable capital gains tax rate ©2015 Kaplan, Inc.

Deductions from Gross Income for Investment Properties Operating expenses –Replacement expenses but not reserves Financing expenses –Mortgage interest (points amortized) Depreciation –Deduction of cost of improvements ©2015 Kaplan, Inc.

Depreciation for Income Taxes Depreciable basis –Land is not depreciated Straight-line depreciation –27.5 years residential rental property –39 years nonresidential income-producing property ©2015 Kaplan, Inc.

Straight-Line Depreciation Formula Depreciable basis (cost of structure) divided byUseful life (27.5 or 39 years) equalsAnnual depreciation ©2015 Kaplan, Inc.

Tax Depreciation Example An office building was purchased for $600,000. An appraisal indicated that the building represented 80% of the value. What is the annual depreciation deduction for tax purposes? $600,000 x 80% = $480,000 depreciable basis $480,000 ÷ 39 years = $12, Annual depreciation deduction = $12, ©2015 Kaplan, Inc.

Tax Shelter When an investment protects some income or gain from taxation Annual depreciation deduction makes a real estate investment a tax shelter ©2015 Kaplan, Inc.