Chapter 18
SAM
IRLANDER
© 2009 by South-Western, Cengage Learning
Florida Real Estate:
Principles, Practices and
License Law
Chapter 18
Taxes Affecting Real Estate
© 2009 by South-Western, Cengage Learning
Key Terms
Active income
Ad valorem
Arrears
Assessed value
Boot
Exempt income
Exempt properties
Green Belt Law
Immune properties
Installment sale
Just value
Like-for-like trade
Passive income
Portfolio income
Special assessment
taxes
Tax base
Tax rate
Taxable income
Taxable value
Truth-in-millage (TRIM)
notice
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Taxation
Real property tax
Revenue for state and local
government
Not federal government
Two types
Ad valorem
Special assessment
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Taxation
Ad valorem: according to
valuation
Assessed value: value for
determining taxes
Just value: fair market value
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Taxation
Establishing assessed
value:
Review of property
characteristics
Analysis of highest and
best use
Application of approaches
to value
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Taxation
Determining assessed value
of income-producing
property:
Occupancy
Vacancy information
Rents received
Leasing incentives
Expenses
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Taxation
Step 1: Reduction
determination
Step 2: Appeal to the Value
Adjustment Board
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Taxation
Step 3: If appeal is:
Granted: assessment
reduced
Denied : litigation
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Taxation
Immune properties: not
subject to taxation
Government-owned buildings
Others: municipal airports
and military bases
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Taxation
Exempt properties: subject to
taxation but not obligated
Churches and charitable
organizations
Homesteads
Widow / widowers, blind, or
other disabilities
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Taxation
Primary residence
$25,000 applied against
assessed valuation
Owned by January 1
Proof of ownership by
March 1
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Taxation
Formula:
Assessed Property Value
- Granted Homestead Exemption
= Property Value Subject to Taxation
X Mill Rate (Tax Rate)
Annual Tax
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Taxation
Example:
Taxable value: assessed
value minus exemption
$100,000 Assessed value
- $ 25,000 Homestead exemption
$ 75,000 Taxable value
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Taxation
$500 property tax exemption
Plus $25,000 homestead
$500 property tax exemption
Ceases upon remarrying
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Taxation
10% or more disabled due to
military service
$5000 property tax exemption
Total and permanently
disabled due to military
service
Total exemption
May extend to spouse
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Taxation
Restricts the amount of increase
of a homestead property
Limited to the lesser of:
3% of previous value
% change in Consumer Price
Index
Limits lifted upon transfer
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Taxation
Property tax disclosure:
Tax at time of sale may not
be the same in subsequent
year
Reassessment may occur
due to the sale
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Taxation
Green Belt Law: favorable
tax treatment for
agricultural properties
Assessed value based on
current use
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Taxation
Districts:
County
City
Special districts
Schools
Tax base: total taxable
value of all real property in
a district
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Taxation
Mill rate: rate of
taxation
Mill is 1/1000 of one
dollar
1/10 of one cent
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Taxation
To convert the mill rate to
dollars, divide by 1000
40
1000
= 0.04
To convert dollars to
mills, multiply by 1000
0.008
X 1000
8
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Taxation
To set mill rate:
Annual budget - Revenue
Total taxable value
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Taxation
Example:
Annual budget: $16,500,000
Other revenue: $500,000
Taxable value: $2,000,000,000
$16,500,000 - $500,000
$2,000,000,000
= .008 per dollar of taxable
value or 8 mills
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Taxation
Formula:
Assessed Value
- Exemption, if any
Taxable Value
X Mill Rate
Taxes to be Paid
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Taxation
Homestead exemption
Assessed value: $100,000
Mill rate: 8
$100,000 Assessed Value
- $ 25,000
$ 75,000
Exemption
Taxable Value
X .008
Mill Rate
$ 600
Taxes owed
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Taxation
Truth-in-millage notice:
assessed value mailed prior
to actual rendering of bill
Florida ad valorem levied
on calendar year
Arrears: paid at end of year
Tax liens have priority over
all other liens
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Taxation
Special assessment taxes:
funds project that benefits
only some citizens
Neighborhood street
paving
Water and sewer
installation
Neighborhood street lights
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Taxation
Tax based on benefit
Assessed by front footage
Priority over all other liens
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Federal Income Tax
Active income:
compensation from
employment
Salary / wages
Commissions
Gratuities
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Federal Income Tax
Passive income: business
activity or investment
where individual is not
actively in charge of day-to
day activities
Limited partnership
Real property investments
Sale of stocks
Other investments
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Federal Income Tax
Portfolio income:
Stock dividends
Interest earned
Royalties on
intellectual property
Annuities
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Federal Income Tax and Real
Property
Two issues:
Deductions when
calculating tax due
How tax is calculated
when real estate is sold
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Federal Income Tax and Real
Property
Expenses an individual may deduct from
taxable income:
Property taxes
Mortgage interest
Origination fees
Home equity mortgages
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Federal Income Tax and Real
Property
Expenses a business or investor may
deduct from taxable income:
Property taxes
Mortgage interest
Additional items
Operation expenses
Depreciation
Operation losses
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Federal Income Tax and Real
Property
Interest on Mortgage
First and second homes
Delinquent and late payments
Only interest due and payable
in that year plus one month
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Federal Income Tax and Real
Property
Local Property Taxes
Deductible in year paid
Uninsured Casualty losses
Fire, theft, weather, earthquake,
flood, and other natural causes
$100 IRS deductible plus 10%
of adjusted gross income
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Federal Income Tax and Real
Property
Business deductions not available for
individuals
Expenses of Operation
Repairs
Maintenance
Insurance
Management fees
Utilities
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Federal Income Tax and Real
Property
Depreciation:
Cost recovery
Caused by 3 events:
Physical deterioration
Functional obsolescence
External obsolescence
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Federal Income Tax and Real
Property
Deduction of a percentage of the cost of
any improvement over a period of years
Land does not depreciate
Tax assessment
Value of land
Value of improvements
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Federal Income Tax and Real
Property
Purchase price: $100,000
Land value: $20,000
$20,000
= 0.20 or 20%
$100,000
Land value is 20% of total property
value
Value of improvement: 80%
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Federal Income Tax and Real
Property
Cost of acquisition
$ 6,000
Commission
$ 4,000
Legal Fees
$ 1,500
Appraisal
$ 900
$ 12,400
Survey
Cost of Acquisition
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Federal Income Tax and Real
Property
Total cost to acquire property
$ 100,000
$ 12,400
$ 112,400
Purchase Price
Cost of Acquisition
Total cost to
acquire property
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Federal Income Tax and Real
Property
Amount attributed to the improvement
$ 112,400
X
80%
$ 89,920
Total cost to
acquire property
% improvement
portion
Total cost attributed
to improvements
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Federal Income Tax and Real
Property
Residential rental property depreciated over
27.5 years
$ 89,920 Total to be depreciated
27.5
# of years
= $ 3,270 Depreciation per year
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Federal Income Tax and Real
Property
Nonresidential property recovery period:
After May 13, 1993 - 39 years
Accelerated method
Greater depreciation in early years
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Federal Income Tax and Real
Property
Gains: profit on sale of
real property
Capital gain
Amount Realized
- Adjusted Basis
Capital Gain
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Federal Income Tax and Real
Property
Amount realized: actual
selling price less cost of
sale
Real estate commission
Closing costs / points
Attorney fees
Survey costs
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Federal Income Tax and Real
Property
Adjusted basis:
Basis: purchase price
plus cost of acquisition
Capital improvements
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Federal Income Tax and Real
Property
Residential Property vs. Business/Investment
Property: calculating adjusted basis
Residential Property
Purchase Price
Business/investment Property
Purchase Price
+ Cost of Acquisition
+ Cost of Acquisition
+ Capital Improvements
+ Capital Improvements
Adjusted Basis
- Accumulated Depreciation
Adjusted Basis
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Federal Income Tax and Real
Property
Homeowner may exclude
up to:
$250,000
$500,000 married filing
jointly
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Federal Income Tax and Real
Property
Ownership Test
2 of the last 5 years
Use Test
Must live in the home as a
principal residence
May be continuous or
interrupted
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Federal Income Tax and Real
Property
$250,000
$500,000
Married and files jointly
Either spouse meets
ownership test
Both spouses meet use test
Neither can exclude gain
from sale of another home
in the same year
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Federal Income Tax and Real
Property
Once every 2 years
Reduced exclusion may
be available if due to
health or employment
Not a once in a lifetime
exclusion
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Federal Income Tax and Real
Property
Maximum tax rate:
8%, 10%, 15%, 25% or
28%
Factors:
Type of property
How long property was
held
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Federal Income Tax and Real
Property
Installment sale: payment
received over time
Seller can postpone
payment of tax to future
years
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Federal Income Tax and Real
Property
Tax free exchange:
payment deferred
Real property held for
investment, income, trade,
or business
Like-for-like trade: both
properties must be eligible
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Federal Income Tax and Real
Property
Property values are the
same
Neither pays
No gain or loss for either
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Federal Income Tax and Real
Property
Property values are not the
same
Boot: Party with lower
value property pays
money or gives something
else
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Federal Income Tax and Real
Property
Party trading up: No tax
owed
Party trading down: pays
tax due to:
Payment of boot
Exchange of mortgages
with different values
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