©2011 Cengage Learning
California Real Estate
Principles
Chapter 13
Introduction to Taxation
©2011 Cengage Learning
Ch 13
 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.
©2011 Cengage Learning
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
©2011 Cengage Learning
Real Property Taxes
Assessed at full cash value
General (Ad Valorem)
Taxes
1. For general
support of
government
2. Levied against all
taxable real
property
3. Recur annually
©2011 Cengage Learning
Special Assessment
Taxes
1. For specific purpose
2. Levied only against
properties benefited
3. One-time tax
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 $2,122.42 x 102% = $2,164.87
©2011 Cengage Learning
PROPOSITION 13
Full Cash Value = $500,000
X 1% + local % = x 1.25%
Property Tax
= $6,250
Ownership since March 1975
3/75 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.
©2011 Cengage Learning
No Tax Change
 Between spouses
 First $1 million of real
property from parents to their
children
©2011 Cengage Learning
Propositions 60 & 90
 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.
©2011 Cengage Learning
Real Property Tax Year
Fiscal Year
Jan Jul
Sep
Nov Dec
Feb
Apr
Jun
1
1
1
1
10
1
10
30
Jan 1 – Becomes a lien on the property
- File tax exemptions prior
July 1
- Fiscal tax year begins
Sept 1 - Tax rate determined
Nov 1
- 1st installment due (Jul 1 – Dec 31)
Dec 10 - 1st installment delinquent
Feb 1
- 2nd installment due (Jan 1 – Jun 30)
Apr 10 - 2nd installment delinquent
Jun 30 - Fiscal tax year ends
©2011 Cengage Learning
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
©2011 Cengage Learning
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
15
2. Veteran’s Exemption $4,000
3. Property tax postponement law
senior citizens (age 62 or older)
B. blind or disabled
A.
4. California Renter’s Relief Credit
against state income tax liability
©2011 Cengage Learning
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%)
©2011 Cengage Learning
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.
©2011 Cengage Learning
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
©2011 Cengage Learning
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
©2011 Cengage Learning
PERSONAL RESIDENCE
Interest Deduction
Major Tax Advantages for
Homeowners:
©2011 Cengage Learning
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. A homeowner may also borrow
against the equity up to $100,000
and still deduct the interest as
homeowner interest
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.
©2011 Cengage Learning
Installment sale
Sale with down payment & loan.
Tax is due as loan is repaid over term.
©2011 Cengage Learning
Income Property
Annual Deduction
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
©2011 Cengage Learning
Investment property
 Vacant land (unimproved property)
©2011 Cengage Learning
Trade or Business Property
 Owner derives major source of livelihood from
the property
©2011 Cengage Learning
1031 Tax–Deferred Exchanges
1.
2.
3.
4.
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.
+ $25,000 cash
Value $200,000
Basis 100,000
Mortgage 50,000
©2011 Cengage Learning
Value $300,000
Basis 150,000
Mortgage 75,000
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)
©2011 Cengage Learning
Registered Domestic Partners
 RDP cannot file joint income tax returns for either
state or federal taxes.
©2011 Cengage Learning
Review Quiz Chapter 13
1.
The homeowner’s exemption, excluding local
assessments, saves approximately how much in
property taxes?
a. $100
b. $80
c. $70
d. $40
©2011 Cengage Learning
Review Quiz Chapter 13
2. The proposition that allows certain homeowners to
transfer their property tax base to another home in
the same county is:
a. Proposition 13
b. Proposition 57
c. Proposition 60
d. Proposition 90
3.
The second installment of real property taxes is
delinquent if not paid by:
a. November 1
b. December 10
c. February 1
d. April 10
©2011 Cengage Learning
Review Quiz Chapter 13
4. Which of the following is true?
a. A person cannot use a homeowner’s exemption
and a veteran’s exemption on the same home
b. Real property taxes become a lien on the first
Monday in March
c. A 12% penalty is added for delinquent property
taxes
d. California has special property tax exemptions
for senior citizens 45 years or older
©2011 Cengage Learning
Review Quiz Chapter 13
5.
A property was valued at $500,000 for property tax
purposes. According to Proposition 13, what would
be the maximum value for property tax purposes in
two years, assuming the owner did not make
capital improvements?
a. $502,420
b. $504,010
c. $506,220
d. $520,200
©2011 Cengage Learning
Review Quiz Chapter 13
6. To obtain a full homeowner’s exemption, a new
homeowner must file between January 1 and:
a. December 10
b. February 15
c. April 10
d. June 1
©2011 Cengage Learning
Review Quiz Chapter 13
7.
When foreigners sell U.S. property the Foreign
Investment in Real Property Tax Act (FIRPTA) may
require what percentage be withheld from the sale
proceeds?
a. 3-1/3%
b. 5%
c. 10%
d. 13%
©2011 Cengage Learning
Review Quiz Chapter 13
8. When a special assessment is made on a piece of
property under the Street Improvement Act of 1911:
a. Property owner can deduct principal and interest
b. It is based on the front footage of the property
c. It is appraised as per the amount of square
footage
d. Assessment must be paid within six months
9. Under certain conditions, a single home owner
may except up to how much in tax free gains from
the sale of a their personal home?
a. $500,000
b. $300,000
c. $250,000
d. $125,000
©2011 Cengage Learning
Review Quiz Chapter 13
10. An investor who has owned a property for 2 years
and then sells for a gain most likely will pay:
a. Capital gains taxes
b. Ordinary income taxes
c. Only California, not federal taxes
d. Not pay taxes as a sale for cash qualifies as a
1031 exchange
©2011 Cengage Learning
Answers to Review Quiz Chapter 13
1.
C
6. B
2.
C
7. C
3.
D
8. B
4.
A
9. C
5.
D
10. A
©2011 Cengage Learning