1. California Real Estate Principles, 10.1 Edition
Chapter 14
Introduction to Taxation

2. Chapter 14
Describe the real property assessment procedure as required by Proposition 13.
List the rules regarding the date and manner of payment of real property taxes; describe the tax sale procedure in the event of nonpayment of property taxes.
Explain homeowners, veteran's, and senior citizen's property tax exemptions.
List the income tax advantages of real estate ownership, including the changes due to recent revisions in the tax laws.

3. Ad Valorem “According to Value”
Real Property Taxes
House
Motor Home
Boat
Apartment building
Personal Property Taxes
Sales Tax
License Fee
Use Tax
Transfer Tax

4. Real Property Taxes Assessed at full cash value
General (Ad Valorem) Taxes
For general support of government
Levied against all taxable real property
Recur annually
Special Assessment Taxes
For specific purpose
Levied only against properties benefited
One-time tax

5. Proposition 13 Change of ownership form required to tax office
Cash value x 1% = Annual property tax + local taxes
Example: $200,000 lot x 1% = $2,000
Annual property tax x 2% per year = next year’s tax
Example:
Year 1 $200,000 x 1% = $2,000
2 $2,000 x 102% = $2,040
3 $2,040 x 102% = $2,080
4 $2,080 x 102% = $2,122.42
5 $2, x 102% = $2,164.87

6. PROPOSITION 13
Full Cash Value = $500,000 X 1% + local % = x 1.25% Property Tax = $6,250 Ownership since March /75 value + per yr. Max= present value x 1% + local % present tax Upon ownership change Current price paid (full cash value) X 1% + local % Present tax New additions only taxed at current value on new construction, not the entire property.

7. No Tax Change Transfers between spouses
Primary residence plus first $1 million of real property from parents to their children

8. Propositions 60 & 90 Proposition 60: in the same county.
Homeowners age 55 years and over
Allows the transfer of their low, existing property tax base to another home of equal or lower value
Proposition 60: in the same county.
 Proposition 90: to another California county
Only if that county's board of supervisors agrees.

9. Real Property Tax Year Fiscal Year Jan Jul Sep Nov Dec Feb Apr Jun
Jan 1 – Becomes a lien on the property
- File tax exemptions prior 1 1 1 1 10 1 10 30
July Fiscal tax year begins
Sept Tax rate determined
Nov st installment due (Jul 1 – Dec 31)
Dec st installment delinquent
Feb nd installment due (Jan 1 – Jun 30)
Apr nd installment delinquent
Jun Fiscal tax year ends

10. Tax Sale A 10% penalty added to each late installment
June 8 delinquent tax list published
June 30 property “Sold” to state
Five-year redemption period
Un-redeemed property deeded to state
Tax collector publishes notice of intent to sell
Public auction tax sale
Controller’s tax deed

11. Real Property Tax Exemptions
1. California Homeowner’s Exemption $7,000 Reduces property tax ($7000 x 1% = $70) Owner as of January 1-File by February Veteran’s Exemption $4, Property tax postponement laws must be checked with the county in which the property is located 4. California Renter’s Relief Credit against state income tax liability

12. HOMEOWNER’S EXEMPTION
Owner occupied by January 1 and filed by February 15 $7,000 off full cash value $500,000 full cash value -7,000 homeowner’s exempt $493,000 taxable value Saves approx. $70 ($7,000 x 1%)

13. Special Assessments Liens
Tax liens and assessments have priority over all other liens.
Street Improvement Act of 1911
Assessments noted on tax bill
For streets, sidewalks, lighting, water, sewer or benefit the owners directly such as for neighborhood parks, schools, and fire stations.

14. Mello-Roos Community Facilities Act of 1982
Failure to disclose allows buyer a 3-day right of rescission, and may result in disciplinary action for the licensed agent
Municipal bonds
Skirts around property tax limitations of Prop 13
Boom for developers
Broker must disclose to prospective purchaser
May not be fully tax deductible

15. INCOME TAXATION State and federal income tax A progressive tax
Agents: Recommend tax counsel
Tax consequences may be a material fact
Need good record keeping on property

16. PERSONAL RESIDENCE Interest Deduction
Major Tax Advantages for Homeowners:
1. Subject to a $1 million dollar limitation
2. The interest on money borrowed to purchase a first and second home is fully deductible against the homeowner’s income
3. Property taxes paid are deductible against personal income

17. No taxable gain recognized on Residence
Homeowners may claim an exception from taxation on profit from the sale of their personal residence up to a maximum amount of $250,000 for singles, up to $500,000 for married couples.
Homeowner must have owned & resided in home 2 of last 5 yrs.
Can take the deduction every 2 years.
May not deduct depreciation, maintenance or operation expenses.
Any gains above these amounts are taxed at the current capital gain tax rate.

18. Installment sale Sale with down payment & loan.
Income tax is due as loan is repaid over term.

19. Income Property Annual Deduction Depreciation Operating Expenses T
Taxes (Property) I
Insurance M
Maintenance M
Management U
Utilities R
Reserves for Replacement
Depreciation
27 ½ years for residential income property
39 years for non-residential income property

20. Investment property
Vacant land (unimproved property)

21. Trade or Business Property
Owner derives major source of livelihood from the property

22. 1031 Tax–Deferred Exchanges
Pay no taxes at time of equal exchange
The new property must be “like for like” kind
Any “boot” (cash) received is taxable The exchange may be simultaneous or delayed.
If delayed there are rigid timetables and the exchange is frequently called a “Starker” exchange.
Value $300,000
Basis ,000
Mortgage 75,000
+ $25,000 cash
Value $200,000
Basis ,000
Mortgage 50,000

23. Non-personal residence
Exchange – IRC 1031
Decreases basis on new property by the gain deferred on old property
Tax liability is not forgiven - Defers (postpones) tax due, NOT tax “free”
Close of escrow date rules:
Close concurrent
Delayed – accommodator
45 days to name the new property
180 days (6 months) to close the escrow
Mortgage relief (Boot)