Chapter 16: Real Estate Taxation Flashcards
Property Tax Example
Jim and Martha Jones purchased a home last year for $250,000. Their tax bill for last year was $2,500. Assuming an inflation rate of 1.5% this year, the market value of their home would be $253,750 ($250,000 x 1.015) and their taxes will be $2,537.50. The Jones’ future property tax bills can be calculated using the same process for each subsequent year they own the property.
Time Table For Taxes
On January 1, the taxes for the upcoming fiscal year become a lien on the property.
Tax year begins on July 1.
On November 1, the first installment for half the taxes becomes due.
On December 10, at 5 p.m., the first installment becomes delinquent if not paid and a 10% penalty charge is added to the bill.
On February 1, the second installment for the balance of the taxes comes due.
On April 10, at 5 p.m. the second installment becomes delinquent if not paid and a 10% penalty charge is added to the bill.
Note: If taxes are due on a weekend or holiday, the due date or delinquency date is extended to the close of the next business day.
Supplemental Tax Bill Example:
Sally and Dan Beck purchased a home on January 15 for $450,000. Their new property tax will be $4,500. The previous assessment on the home was $150,000; so the previous tax was $1,500 for the fiscal year from July 1 of last year to June 30 of this year.
The Becks will receive the “regular” tax bill of $750 for the second installment of the fiscal year taxes due on February 1, which is based on the old assessment. But they actually owe $2,250 (half of $4,500) in taxes on the property they just purchased. Once the county collector reads the county assessor’s supplemental tax roll, the Becks will receive a supplemental tax bill of $1,500, which represents the $2,250 they owe less the $750 they paid.
Documentary Transfer Tax Example(s):
The tax is computed at the rate of 55 cents for each $500 of consideration or fraction thereof. For example, if a home sold for $175,000 the transfer tax would be $192.50.
$175,000 ÷ $500 = 350 x $.55 = $192.50
If a home sold for $280,000 and the buyer assumed the seller’s $30,000 loan, the transfer tax would be $275.
$280,000 - $30,000 = $250,000
$250,000 ÷ $500 = 500 x $.55 = $275
When is real property reassessed?
Real property is reassessed every time it is transferred.
What does Proposition 58 state?
Proposition 58 allows the transfer of property from one spouse to another or to children without triggering a reassessment.
For whom do property tax exemptions exist and for how much?
There is a homeowner’s exemption for $7,000 against the assessed value and a veteran’s exemption for $4,000 against the assessed value.
Explain the documentary transfer tax.
The California tax laws allow a county or city to adopt a documentary transfer tax to apply to the transfer of properties located in the county. The tax is computed on the total price paid for the property, less any assumed loans. The tax is computed at the rate of 55 cents for each $500 of consideration or fraction thereof.
Depreciating Income-Producing Property Example
An investor owns a single-family residence that he rents out. The home cost $150,000 and the land is worth $30,000, leaving an improvement value of $120,000. If the investor divides the $120,000 by 30 years (the minimum is 27.5), he will have a depreciation figure of $4,000 per year. So he can deduct $4,000 per year for depreciation on this property.
Determining Profit or Loss on a Personal Residence
Alan and Amanda purchased a home 20 years ago for $100,000. They have done some recent remodeling that cost another $150,000. They sold their home for $950,000. What is their gain?
Cost Basis
$100,000
Improvements
+ 150,000
Adjusted Cost Basis
$250,000
Sale Price
$950,000
Sales Expenses
- 6,500
Adjusted Sales Price
$943,500
Adjusted Sales Price
$943,500
Adjusted Cost Basis
- $250,000
Gain (before exclusion)
$693,500
Gain (before exclusion)
$693,500
Exclusion
- 500,000
Gain (after exclusion)
$193,500
Alan and Amanda will have to pay capital gains tax on $193,500.
Under what circumstances can a loss on the sale of a personal residence be deducted from income taxes?
Normally, under no circumstances. But if the property is converted to an income-producing rental, then a loss on the subsequent sale could be deducted.
What items can an owner of an income-producing property deduct that an owner of a personal residence cannot?
Operating expenses and depreciation.
What are the capital gains exclusions associated with the sale of a personal residence?
A single seller can exclude up to $250,000 of gain and a couple can exclude up to $500,000.
What is important for a broker to remember about the Foreign Investment in Real Property Tax Act?
The buyer is responsible for withholding 15% of the sales price if the seller is a foreigner and the home is priced over $300,000. If the money is not withheld, the buyer and broker are equally responsible and the broker could end up paying the entire unpaid taxes due.
Mike bought his home last year for $150,000. His property taxes would be assessed at:
$1,000
$1,500
$2,250
$3,000
$1,500
