Chapter 18 (Taxes Affecting Real Estate)

Question 1

City and County Property Taxes

Answer 1

Property taxes provide the bulk of local government revenues in Florida.

They account for a large portion of the revenue needed to provide law enforcement, fire protection, and other services.

Question 2

The Real Property Taxation Process

Answer 2

Real estate taxes (commonly called property taxes) are based on the value of real property, hence the term ad valorem tax, which means according to value.

Florida law requires that the county property appraiser assess real property for all levels of government, thus avoiding duplication and possible controversy.

All real property assessments must be updated annually.

*Property taxes in Florida are levied on a calendar-year basis.

Taxes are paid in arrears (at the end of the tax year) for the period January 1 through December 31 each year.

Property taxes become a lien on all real estate in Florida on January 1 each year.

This lien is legally superior to any other lien, regardless of date.

Taxes are payable to the county tax collector on or after November 1 each year.

Property owners may pay property taxes in four installments or in a single payment.

A discount system permits property owners to realize a discount through prompt payment of taxes.

All payments made on or after March 1 must be for the full amount of taxes levied.

Property taxes for the previous year become delinquent on April 1.

Question 3

Just Value

Answer 3

The fair and reasonable value based on objective valuation methods for property tax purposes.

Question 4

Assessed Value

Answer 4

The value of a property for property tax purposes.

Question 5

Determining “Just Value”

Answer 5

Property taxes are levied against land and all improvements to the land.

The assessed values of the land and improvements are arrived at separately and then combined to reflect a single assessed value.

The state Supreme Court has interpreted Florida statutes as requiring that all real property be assessed at just value.

Just value is the fair and reasonable value based on objective valuation methods.

In arriving at a just valuation, county property appraisers take into consideration property characteristics such as location, size, and condition of the property.

The county property appraiser also considers the highest and best use of the property and, if income producing, the income generated from the property.

Just value, for ad valorem purposes, may not conform to market value, but it is calculated in relation to a market value base.

Property appraisers apply three approaches to value:

(1) The sales comparison,
(2) Cost-depreciation, and
(3) Income approaches.

If the property is sold during the year, the sale price becomes a factor for consideration in assessing the value of the property, but it is not the controlling factor.

Representatives of the property appraiser’s office typically go into the community to assess property, collecting data using specific forms and recording procedures. The information obtained from field trips is then processed through a computer, using appropriate valuation formulas to render an objective estimate of assessed value.

*Assessed value is the value of a property established for property tax purposes.

Once an assessment has been placed on a property, the owner must be informed.

A Notice of Proposed Property Taxes is mailed to the property owner at the address of record.

The notice is also called a *TRIM (truth in millage) notice.

It is the responsibility of each property owner to see that a current mailing address is on file for all properties owned. Current addresses are needed to ensure that owners receive a notice of change in assessment before the time allowed for protest has expired.

Any property owner is entitled to protest a property assessment, but not every protest will be successful.

For example, an owner of a home on a standard lot in a large, completely developed subdivision who complains that the lot was assessed too high will have little hope of getting the assessment changed.

If the assessed value of the lot were changed, all the owners of similar lots could protest their assessments.

The same homeowner might have a better chance of obtaining a lowered assessment if the evidence indicates the house was assessed at a value greater than justified.

The county property appraiser has fairly complete details on the square footage, construction materials, year built, and amount of estimated depreciation since the date of construction, as well as records showing the assessed values of similar structures in the neighborhood.

Question 6

Protest Procedure

Answer 6

When a Florida property owner feels the assessed value is inaccurate or does not reflect fair market value, the owner can use the following three-step protest procedure:

1. The first step is to seek an adjustment by contacting the county property appraiser or a representative of that office.

A property owner is allowed 25 days after the TRIM notice is mailed to protest the assessment to the county property appraiser.

If the arguments of the property owner are valid and have a basis in fact, the county property appraiser is authorized to make a change and to lower the assessed value.

2. If the property owner’s request for an adjustment is rejected, the owner may file an appeal (petition) with the Value Adjustment Board.

This board is made up of five members:

Two county commissioners, one school board member, and two citizen members.

If the board agrees with the taxpayer that the assessed value of the property is too high, the board has the authority to change the assessment.

If the board decides that the county property appraiser assigned the correct assessment value, the board will reject the taxpayer’s request.

3. The final step available to a property owner seeking a change in assessed value is litigation in the courts.

The taxpayer may pay the taxes under protest and file a suit (a certiorari proceeding, meaning a review of the matter by the courts) against the county property appraiser and the county tax collector.

The property owner’s petition must be filed within the statutory period (Chapter 194, F.S.).

The court may not arbitrarily assign an assessment value to a property.

It may, however, specify the methods and procedures that the county property appraiser should use in reassessing the subject property.

If the court judges the original assessed value to be just and equitable, the property owner has used all the steps available under the protest process, other than to appeal to a higher court. (See saved chart)

Question 7

Tax Districts: Budgets and Tax Rate Levy

Answer 7

Every fiscal year, each tax district (city, county, school board, or special tax district) prepares an operating budget for the next fiscal year.

The operating budget prepared by each tax district is actually a summary of several departmental budgets.

For example, the police department submits a budget that reflects the estimated cost of operating every phase of that department’s activities during the coming fiscal year.

The same process is followed by public works, health, welfare, finance, fire, and all other departments or agencies.

When consolidated, all the individual department budgets make up the total city or county budget for the next fiscal year.

*With the budget in hand, the tax district knows just about what expenses to expect for the next year.

The next issue is obtaining sufficient revenue (income) to pay the expenses.

No elected official is eager to levy higher property taxes than are absolutely necessary to operate the tax district.

So before a general real estate tax is calculated, an attempt is made to estimate the revenue that can reasonably be expected from all sources other than real property taxes.

Each tax district may have different or unique sources of income, ranging from outright federal grants to profits resulting from municipally owned utilities.

Fines paid in courts, parking meter income, fees from occupational licenses, and tax funds returned by the state government are a few of the other sources of income.

Estimating the amount of income from these nonproperty tax sources is made easier by records of preceding years, which indicate a predictable trend.

*With a reasonable estimate in hand of the revenue expected from all nonproperty tax sources, the tax district is able to predict the amount of money needed from property taxes.

The amount of property taxes paid to a tax district must come from its tax base.

The tax base is the total assessed value of all taxable property in the tax district.

The next component needed to compute a tax rate is the number and type of property tax exemptions granted.

Question 8

Immune

Answer 8

City, county, state, and federal government properties.

Question 9

Exempt

Answer 9

Property belonging to churches and nonprofit organizations.

Question 10

Partially Exempt

Answer 10

The property is subject to taxation, but the owner is partially relieved of the burden.

Question 11

Taxable Value

Answer 11

The nonexempt assessed value that is determined by subtracting the applicable exemptions from the assessed value.

Question 12

Exemptions from Property Taxes

Answer 12

The owners of certain properties are relieved of the obligation to pay property taxes.

Others are partially exempted.

1. Immune properties are city, county, state, and federal government properties.

Examples of immune properties include county courthouses and military facilities.

*Immune properties also include special properties, such as municipal airports, that have been made immune by statute or ordinance.

Immune properties are not assessed and are not subject to taxation.

2. Exempt properties include property belonging to churches and nonprofit organizations.

Exempt properties are subject to taxation, but the owner is released from the obligation.

3. Partially exempt property is subject to taxation, but the owner is partially relieved of the burden.

For example, all owners of homesteaded property are granted a partial tax exemption.

For this reason, one cannot always regard the assessed value of a property as the taxable value of that property.

The taxable value of a property is not known until existing exemptions are subtracted from the assessed value.

Taxable value (nonexempt assessed value) is determined by beginning with assessed value and subtracting appropriate exemptions.

Question 13

Homestead Tax Exemptions

Answer 13

Florida residents who hold title to a home in Florida and use the home as their permanent residence may establish their residence as a homestead.

Floridians who homestead their residence receive a homestead exemption, which reduces the amount of property taxes owed.

A person who holds title to more than one residence in the state of Florida may homestead only one residence.

Applicants must reside in the home and have legal title to the property as of January 1 to be eligible to file for the homestead tax exemption.

*First-time applicants must file an application with the county property appraiser’s office on or before March 1.

Some counties allow homeowners to file the initial application throughout the year. However, if the application is filed after the March 1 deadline, the homestead exemption will not take effect until the following year.

The procedure for renewing the homestead exemption varies from county to county. In most counties the property appraiser mails a renewal card on or before February 1 of each year.

A county may choose to waive the requirement to renew the exemption each year once the initial application is made and the exemption is granted.

However, if an individual no longer qualifies for the homestead exemption and fails to notify the county, the law provides for payment of penalties and interest on unpaid property taxes.

Homeowners are entitled to a $25,000 homestead exemption from the assessed value of the home for city, county, and school board taxes.

Homeowners are entitled to an additional $25,000 exemption from city and county taxes (but not school board taxes) on the property’s assessed value between $50,000 and $75,000. Figure 18.3 displays the applicable homestead exemption depending on the amount of assessed value.

• Homesteaded properties with an assessed value of $75,000 or more are entitled to the entire $50,000 homestead exemption.
• Homes with an assessed value of $50,000 or less are entitled to the base $25,000 exemption.

The property tax exemption for a homestead is deducted from the assessed value of the property before property taxes are calculated.

Question 14

Taxable Value Examples

Answer 14

The formula to calculate taxable value is:

  assessed value - homestead exemptions = taxable value

*Question:

For example, a homesteaded condominium unit has an assessed value of $49,000.

What is the amount of the homestead exemption? What is the taxable value of the property?

*Answer:

The assessed value is less than $50,000. Therefore, the homestead exemption is $25,000:
$49,000 assessed value - $25,000 homestead exemption = $24,000 taxable value

The total exemption that applies to the homesteaded property in the example is $25,000.

The additional $25,000 exemption applies to property with a value greater than $50,000.

The additional exemption will apply only if the assessed value of the property exceeds $50,000, and it will apply to the amount by which the value exceeds $50,000, up to a total additional exemption of $25,000.

Homesteaded property valued at more than $50,000 but less than $75,000 receives a prorated exemption.

*Question:

For example, a homesteaded duplex unit has an assessed value of $66,000.
What is the amount of the homestead exemption?
What is the taxable value of the property?

*Answer:

The base $25,000 homestead exemption applies to the assessed value up to $50,000:

  $66,000 assessed value - $50,000 = $16,000 additional exemption
  $25,000 base exemption + $16,000 additional exemption = $41,000 total homestead exemption
  $66,000 assessed value - $41,000 applicable homestead exemption = $25,000 taxable value

*Note that the $16,000 additional exemption does not include an exemption for school board taxes.

Only the base $25,000 homestead exemption is exempt from school board taxes.

To be entitled to the full $50,000 homestead exemption, a homesteaded property must have an assessed value greater than $75,000.

*Question:

For example, Mr. Pasco owns a homesteaded single-family residence that has an assessed value of $350,000.

1. What is the amount of the homestead exemption for this property?
2. What is the taxable value of the property for calculating school taxes?
3. What is the taxable value of the property for calculating city and county taxes?

*Answer:

This homesteaded property qualifies for the entire $50,000 homestead exemption because its assessed value exceeds $75,000.
$25,000 base homestead exemption + $25,000 additional exemption = $50,000 total homestead exemption

The taxable value for calculating school taxes uses only the base $25,000 homestead exemption because only the base $25,000 homestead exemption is exempt from school board taxes.
$350,000 assessed value - $25,000 base homestead exemption = $325,000 taxable value for school taxes only

Use the total homestead exemption to calculate the taxable value for city and county taxes:
$350,000 assessed value - $50,000 homestead exemption = $300,000 taxable value for city and county taxes

Question 15

Additional $500 Exemptions

Answer 15

The following individuals qualify for an additional $500 exemption from the assessed value of their homesteaded property:

1. Widows and widowers (surviving spouse who has not remarried)
2. Legally blind persons
3. Nonveterans who are totally and permanently disabled
4. A Florida physician, the Division of Blind Services, or the Social Security Administration must certify the disability.

Question 16

Disabled Veteran Exemption

Answer 16

Military veterans who are at least 10% disabled by service-connected misfortune are entitled to an additional $5,000 exemption on their homesteaded property.

A veteran who is totally and permanently disabled because of a service-connected injury is entitled to a total exemption from property taxes on homesteaded property.

In some cases, this may carry over after the veteran’s death to the widow or widower.

Additional exemptions may be available to some veterans, deployed active duty military personnel, and surviving spouses of first-responders.

For more information, refer to the Florida Department of Revenue weblink in this unit.

Question 17

Age 65 and Older Exemption

Answer 17

Florida law authorizes counties and municipalities to grant, by ordinance, an additional homestead exemption of up to $50,000 for persons age 65 and older.

Household income is restricted to no more than $20,000 (adjusted annually for inflation) to qualify.

A county or a municipality that chooses to pass this ordinance can grant persons 65 and older a tax exemption.

Counties and municipalities, however, are not required to pass this ordinance.

Question 18

Special Exemption for Quadriplegics

Answer 18

A homestead owned by a quadriplegic is exempt from taxation.

Also, low-income individuals with total and permanent disabilities may be eligible for a total tax exemption on their homesteaded property (statutory restrictions apply).

Question 19

Order of Cumulative Homestead Tax Exemptions

Answer 19

The taxable value of a homesteaded property is calculated by totaling all the tax exemptions that apply to a particular owner and deducting this amount from the assessed value.

Therefore, a widower with an assessed value of more than $75,000 would qualify for a total tax exemption of $50,500. And if the same individual were also legally blind, the legally blind widower would qualify for a total tax exemption of $51,000 on his homesteaded property.

Question 20

Florida’s Green Belt Law

Answer 20

State law intended to protect farmers from having taxes increased just because the land might be in the path of urban growth.

Florida law authorizes county property appraisers to assess agricultural land by a more favorable method than that used for other properties.

If a taxpayer’s land is so classified for assessment purposes, the county property appraiser must base the property tax assessment solely on the basis of the land’s current character and use.

The highest and best use of such land (such as commercial development) is not a factor in arriving at just value for agricultural purposes.

Florida’s Green Belt Law was designed to protect farmers from having taxes increased just because the land might be in the path of urban growth and therefore well suited for development.

An agricultural land classification results in a lower property assessment. Without such protection, a farmer’s taxes could be raised to the point where it no longer would be economically feasible for that farmer to continue the agricultural use.

Because of lower taxes on agricultural land, speculators often have been attracted to such properties when they are located in the path of urban growth.

In many instances, the law, which was intended to protect the farmer, has been used as a tax protection by speculators.

To stop this practice, the Florida Green Belt Law was changed to require that all county property appraisers annually classify all lands within the county.

Property owners desiring that their land be classified differently must request and rejustify such classification before March 1 each year.

If the request is denied, these property owners may appeal the denial through the regular protest procedure used by other property owners.

Question 21

Save Our Home

Answer 21

The Save Our Home amendment of the Florida Constitution caps how much the assessed value of homesteaded property may increase in a given year.

According to Chapter 193, F.S., the just value of homesteaded property may be increased either:

3% annually (based on the assessed value for the prior year); or
the percentage change of the Consumer Price Index (CPI) for the preceding year, whichever percentage is less.

*The Save Our Home (SOH) benefit is the difference between the assessed value and the market value of a homesteaded property due to the annual limit on increases in assessed value.

The SOH benefit is portable.

Homeowners who have had the homestead exemption on their current home in either of the two preceding years can transfer their SOH benefit to a new home.

A homesteaded property owner can transfer up to $500,000 of SOH benefit to a new homestead.

Property owners moving to a more expensive home transfer up to the entire $500,000 benefit.

Property owners moving to a less expensive home transfer the same proportion of tax savings realized in the previous homestead.

The Department of Revenue has prepared a set of examples illustrating how to calculate the portability benefit when downsizing homesteads plus other scenarios.

*When homesteaded property is sold, it is assessed at just value as of January 1 of the year following a change in ownership.

The assessed value of a homesteaded property may significantly increase after a change in ownership if the previous owners lived in the home for a number of years and the property in the area has experienced strong property appreciation.

Licensees should avoid estimating a buyer’s property tax liability by referring to a seller’s current taxes because the purchaser may be liable for substantially higher property taxes than the previous owner of the home.

Prospective purchasers of residential property must be given a disclosure summary regarding property taxes.

The disclosure summary informs purchasers that they cannot rely on the seller’s current property taxes as the amount of property taxes the purchaser may be obligated to pay in the year following purchase of the property.

The disclosure further explains that the sale of the property triggers a reassessment of the property’s value.

Buyers who have questions concerning the amount of property taxes they can expect to pay on the homes they are considering buying should be referred to the county property appraiser’s office.

Question 22

Tax Rates

Answer 22

To calculate the dollar amount of property taxes owed, the taxable value of the property is multiplied by the appropriate tax rate. The tax rate is expressed in mills.

A mill is one one-thousandth of a dollar (or one-tenth of a cent).

*There are 1,000 mills in a dollar. Thus, a tax rate of .010 is expressed as 10 mills.

Florida has legislated a “cap” (ceiling) that limits cities, counties, and school boards to a basic real property tax rate of no more than 10 mills each.

One mill is properly written in decimals as .001.

When the decimal .010 is used, it means one cent, or 10 mills.

To convert the tax rate from a decimal form to mills, simply move the decimal point three places to the right. Add zeros, if necessary.

Always use three digits when expressing tax rates to prevent confusion. For example, .009 = 9 mills and .010 = 10 mills.

To convert millage to its decimal form, move the decimal point three places to the left of the written or unwritten decimal point. For example, 20 mills = .020 and 25.9 mills = .0259.

For example, assume that a county has an approved operating budget for the next fiscal year with expected expenditures of $10,500,000.

A review of past and present experience indicates a reasonable expectation of $500,000 in revenue from sources other than property taxes.

The county property appraiser reports a total assessed valuation of all taxable properties in the amount of $1,050,000,000 less $50,000,000 in exemptions.

Question 23

Annual Property Taxes Due

Answer 23

The formula to compute annual property taxes due is:

  taxable value × tax rate = annual property taxes due.

*For example, using the tax rate of .010 for a home assessed at $180,000 that has qualified for homestead tax exemption, the calculation of the county property taxes is as follows:

  $180,000 assessed value - $50,000 homestead exemption = $130,000 taxable value × .010 tax rate = $1,300 property taxes due.

• Note that two separate types of value are involved in determining the actual property tax.
• The tax rate, in mills, is always applied to the taxable value.

Any exemption must be deducted from the assessed value to find the taxable value.

Where no exemptions apply, the taxable value and the assessed value are the same.

The taxable value is always multiplied by the tax rate to find the amount of tax.

The tax rate usually changes each year owing to differences in operating budget costs and revenues.

Not all property owners are subject to the same tax rates. A homeowner living in a city pays city, county, and school board taxes. Perhaps additional taxes will be required as a result of bonds or other obligations approved by the voters.

Usually a homeowner living in the county but outside the city limits pays only county and school board taxes. Often, additional taxes are required of county residents who are located in special tax districts.

*Question:

For example, Mr. Pasco’s homesteaded single-family residence has an assessed value of $350,000. The millage rate for the school district is 6 mills, city 7.1 mills, and county 8.2 mills.

1. How much is owed for school district taxes? 2. How much is owed for city and county taxes? 3. What is the total property tax bill for this property?
   * Answer:

Taxable value for calculating school district taxes applies to the base $25,000 homestead exemption.

To multiply by 6 mills, convert to a decimal: 6 mills = .006.
$350,000 assessed value - $25,000 base homestead exemption = $325,000 taxable value for school taxes only
$325,000 taxable value × .006 = $1,950 school district taxes

Taxable value for calculating city and county taxes applies to the entire $50,000 homestead exemption (the assessed value of this property exceeds $75,000).
$350,000 assessed value - $50,000 homestead exemption = $300,000 taxable value for city and county taxes
7.1 mills city + 8.2 mills county = 15.3 mills = .0153 (decimal form)
$300,000 taxable value × .0153 = $4,590 city and county taxes

Add the property taxes for schools and the property taxes for city and county:
$1,950 school district taxes + $4,590 city and county taxes = $6,540 total taxes due

*Question:

In another example, Mr. Pasco is interested in finding the amount of savings in property taxes realized from the tax exemptions.

1. What is the amount of savings to the homeowner resulting from the homestead exemption applied to school board taxes?
2. What is the amount of savings resulting from the homestead exemption applied to city and county taxes?
3. What is the total amount of savings from property taxes realized by this homeowner?

*Answer:

To calculate the savings resulting from the homestead exemption applied to school district taxes, multiply the millage rate for schools (in decimal form) by the base homestead exemption:

  $25,000 base homestead exemption × .006 = $150 savings from school district taxes

To calculate the savings resulting from the homestead exemption applied to city and county taxes, multiply the millage rate for city and county by the total applicable homestead exemption:

  $50,000 total homestead exemption × .0153 = $765 savings from city and county taxes

Add the property tax savings for the school district to the property tax savings for the city and the county:

  $150 + $765 = $915 total savings realized

*Question:

What if Mr. Pasco lived outside the city limits in the same county?

1. How would this affect Pasco’s property taxes? Remember that Pasco will still owe the school district taxes of $1,950.
   * Answer:

Calculate the property taxes omitting the city taxes:

  350,000 assessed value - $50,000 homestead exemption = $300,000 taxable value for county taxes

  8.2 mills county = .0082 (decimal form)
  $300,000 taxable value × .0082 = $2,460 county taxes

  $2,460 county taxes + $1,950 taxes = $4,410 total taxes due.

Question 24

Special Assessments

Answer 24

A one-time tax levied on properties to help pay for a public improvement that benefits the property.

When city sewers are extended to neighborhoods previously dependent on septic tanks or when unpaved streets are paved, it is assumed that the properties affected receive an increase in value owing to the improvement.

Sometimes the municipal authority that levies the special assessment considers affected properties to have benefited in value when the improvement actually may have caused a decrease in value.

A quiet residential street that is widened into a four-lane boulevard to relieve congested access routes might be an example. The increased traffic, with its resultant noise, pollution, and danger to children, could cause property values to drop instead of increase. In such cases, the property owners can look for relief from the courts.

Laws that allow the levying of special assessments specifically require that all improvements benefit any property against which a special assessment is levied. Court records are abundant with instances where courts at all levels, up to and including the U.S. Supreme Court, have ruled in favor of property owners when improvements did not enhance the value of affected properties.

Special assessments are not ad valorem taxes; they are not levied according to the value of a property.

• Usually, special assessments are levied on a front-foot basis for items such as sidewalks and street paving. They are often levied on a per hookup basis for utility and sewer improvements.
• Question:

For example, you live on an unpaved street.

The city is petitioned to pave the street and agrees to do so. The paving cost is $24 per foot, and the city is to pay 30% of the cost.

1. If your lot frontage on the street is 100 feet, what will your special assessment be for street paving?
   * Don’t forget that your street has two sides and the property across the street must bear its fair share.100 front feet × $24 per foot = $2,400
   $2,400 × .70 (owner’s share of cost is 100% - 30%) = $1,680
   $1,680 ÷ 2 (one-half of the street paving cost) = $ 840

Question 25

Nonpayment of Real Property Taxes

Answer 25

Property taxes constitute a lien superior to all other liens on real property.

Special assessments are next in priority.

When a property owner fails to pay property taxes, the taxing authority must take steps to obtain the tax money needed to help pay for the cost of government.

In Florida, unpaid property taxes are considered a debt, just as though the property owner had signed a promissory note for the amount of the taxes.

Further, the property is security for the debt and can eventually be sold to satisfy the obligation.

The city or county government is responsible for the cost of its day-to-day operation and must collect delinquent taxes in some manner.

To do this, a property tax certificate in the amount of taxes owed is issued for each delinquent property.

A list of all delinquent properties is published in a newspaper having general circulation throughout the county.

This publication gives all delinquent owners notice that tax certificates on their properties will be sold if the taxes are not paid before the date of sale.

The published list of properties, including the amount of taxes in arrears, specifies a date, time, and place for public auction of tax certificates on each property listed.

The county tax collector may conduct electronic online sales of tax certificates.

At the auction, any qualified person is entitled to bid for the tax certificate on any property.

Instead of bidding in dollars, investors bid interest rates at the auction, starting at 18% and going down. The bidder who is willing to accept the lowest interest rate is issued the tax certificate.

Once the certificate is sold, the bidder must pay the face amount of the certificate to the county (taxes, interest, and advertising cost).

For a certificate to be redeemed by the owner of the property, the tax collector must collect the face amount of the certificate plus all accrued interest.

The certificate holder is then paid the face amount of the certificate plus accrued interest.

• The holder of the tax certificate can force a public auction of the property by requesting a tax deed after two years but no later than seven years.
• A tax certificate expires seven years from the date of issue.

Anyone can bid at the foreclosure sale, and the property will be sold to the highest bidder.

If not the successful bidder on the property, the holder of the tax certificate then will be paid the amount invested plus interest.

If there are no bidders, the holder of the certificate is issued a tax deed.

Once the property is transferred by tax deed, all other liens against the property—including mortgages—are wiped out, with the exception of any government liens.

Question 26

Federal Income Taxes

Answer 26

Current federal tax laws greatly affect the benefits that may be obtained from the purchase, ownership, and disposition of real property.

The tax considerations of owning personal or investment property are important, but they are also complex.

Question 27

Principal Residence

Answer 27

Tax laws are designed to encourage homeownership and give preferred treatment to taxpayers who own their residences.

The owner-occupied residence may be a house, condominium, mobile home, or houseboat. Regardless, the homeowner has certain tax advantages.

If homeowners-taxpayers itemize deductions rather than claim the standard deduction on their annual federal income tax returns, they may deduct the following:

1. Mortgage interest.
   Interest paid on a mortgage loan on a principal and second home is deductible (certain limitations apply).
2. Property taxes.
   The annual property taxes paid on principal and second homes are deductible.
3. Interest on a home equity loan.
   The interest paid is deductible if the loan does not exceed $100,000.
4. Mortgage origination fees (points).
   Points are deductible in the year they are paid, unless they are paid when refinancing a loan—in such cases, the points must be deducted over the life of the loan.

Additional tax advantages of homeownership include the following:

5. First-time homebuyers.
   First-time homebuyers may make penalty-free (but not tax-free) withdrawals up to $10,000 from their tax-deferred individual retirement funds (IRAs) for a down payment.

Different IRS rules apply to withdrawals from Roth IRAs.
Exclusion of gain from the sale of a principal residence.

An exclusion of up to $250,000 of gain ($500,000 for married couples filing a joint return) realized on the sale or exchange of a principal residence.

Question 28

Sale of Real Property

Answer 28

Federal tax laws classify real property as a capital asset.

Capital gain income is profit from the sale of a principal residence, an investment property, a property used in a trade or business, or an income-producing property, and it must be reported for tax purposes.

The taxable gain on real estate is determined by two factors: the amount realized from the sale and the adjusted basis.

The gain is the amount realized from the sale less the adjusted basis.

*The formula to compute the amount realized from a sale is:
sale price - expense of the sale = amount realized

For example, assume a homeowner sells her home for $165,000 and pays the broker $8,250 and state transfer taxes of $1,155. What is the amount realized?
$165,000 sale price - $9,405 = $155,595 amount realized from sale

The adjusted basis is the owner’s original cost plus buying expenses plus capital improvements (less certain deductions, if applicable).

The formula to compute adjusted basis is:
original purchase price + purchase expenses and capital improvements = adjusted basis

For example, if the homeowner’s original cost was $80,000 and there were purchase costs of $800 and capital improvements totaling $5,200, how much is the adjusted basis?
$80,000 price + $800 costs + $5,200 improvements = $86,000 adjusted basis

A taxpayer-seller’s capital gain (loss) is the amount realized from the sale less the adjusted basis.

The formula to compute capital gain (or loss) is:
amount realized - adjusted basis = capital gain (or loss)

For example, using the information in the previous example, how much capital gain must be reported?
$155,595 amount realized - $86,000 adjusted basis = $69,595 capital gain

While profit from the sale of a principal residence (if not excluded) is included as a capital gain, a loss from such a sale is not allowed as a capital loss and thus may not be deducted.
The IRS allows homeowners to exclude up to $250,000 of gain ($500,000 for married couples filing a joint return) realized on the sale or exchange of a principal residence.

*Any gain above the exclusion is taxed at the applicable capital gains rate.

The exclusion is allowed each time taxpayers sell or exchange a principal residence, as long as the homeowners have occupied the property as their residence for at least two years during the five-year period ending on the date of the sale.

The taxpayer is not required to reinvest the sale proceeds in a new residence to claim the exclusion.

*The exclusion of gain is generally allowed only once every two years.

However, homeowners who do not meet the two-year requirement because of a change in health, job transfer, or other allowable reasons may be eligible for a prorated exclusion of gain.

Question 29

Purchase of Real Property from Foreign Sellers

Answer 29

Another federal government regulation that licensees need to be aware of concerns the purchase of real property in the U.S. from foreign sellers.

To prevent foreign sellers from avoiding the payment of taxes due on the sale of real property, the IRS requires that buyers withhold 10% of the gross sale price (including cash paid and any debt assumed by the buyer). The buyer must report the purchase and pay the IRS the amount withheld. There are a few exceptions to this rule. All licensees should encourage their buyers and sellers to consult the IRS or a tax specialist regarding the application of this rule.

Tax laws are constantly changing, and they are also very complex.

For example, the home equity loan as a source of funds on which the interest is tax deductible may either benefit careful homeowners or result in disaster for homeowners who mishandle their finances. For these and other reasons, it is always wise to retain professional counsel regarding tax situations.

Question 30

Investment Property

Answer 30

Federal income tax laws encourage real estate investment.

Tax benefits include the following: allowable deductions from income, tax deferral and exemptions on resale, installment sale treatment, and like-kind exchanges.

Buyers and sellers should always seek competent tax advice to ensure the most favorable tax treatment in a real estate transaction.

Advance planning is necessary if an investor’s after-tax return on investment is to be maximized.

Question 31

Income Classification

Answer 31

For tax purposes, ordinary income consists of three types:

1. Active income includes wages, tips, commission, and so forth.
2. Portfolio income includes income from interest, stock dividends, capital gains, royalties, and annuity income.
3. Passive income includes income from activities in which the taxpayer does not participate. *Most income from rental or leased real property is classified as passive income.

The significance of these income classifications is that income losses from passive activities cannot be used, with few exceptions, to reduce active and portfolio taxable income.

Investors in rental properties should be advised to consult their tax specialist.

Question 32

Capital Gains and Capital Losses

Answer 32

Real estate, stocks, bonds, and so forth that are owned for investment purposes are capital assets.

When you sell a capital asset, the difference between the amount that you sell it for and your basis, which is usually what you paid for it, is a capital gain or a capital loss.

• You have a capital gain if you sell the asset for more than your basis (for profit).
• You have a capital loss if you sell the asset for less than your basis.

Capital gains are taxed at the applicable capital gains rate.

A capital gain from the sale of real estate investment property can be used to offset a capital loss from the sale of other investment property. Furthermore, if an investor’s capital loss exceeds capital gains, the investor may deduct up to $3,000 in losses in a given year.

Assume, for example, an investor has two investment properties.

One earns a capital gain of $10,000, and the other has a capital loss of $15,000.

The investor can offset the $10,000 gain with $10,000 of the loss.

This leaves a net $5,000 loss of which the investor can deduct $3,000. The investor must carry forward the remaining $2,000 loss to the next year.

As previously discussed, a loss from the sale of your personal residence is not deductible.

Question 33

Deductions from Gross Income

Answer 33

Three types of deductions from gross income are allowed when calculating the taxable income from investment real property:

1. Operating expenses.
   Operating expenses are those cash outlays necessary for running and maintaining the property, and they are deductible in the year paid. Property taxes are considered operating expenses and are deductible. While reserve for replacements is deducted when determining NOI, it is not a cash expense and is not deductible when computing taxable income. Replacement expenses (not capital improvements), however, are deductible in the year paid.
2. Financing expenses.
   Financing expenses include the interest paid, as well as the costs of obtaining borrowed money. While mortgage interest is deductible, principal payments are not. Costs associated with obtaining borrowed funds, such as loan origination fees and points, must be amortized over the life of the loan.
3. Depreciation.
   Depreciation is a means of deducting the costs of improvements to land over a specified period of time. The land itself is not depreciable.
   Depreciation (or cost recovery) allows taxpayers to recover the cost of depreciable property by paying less tax than they would otherwise have to pay.
   Under present tax law, the depreciation deduction usually bears little relationship to actual changes in property value. Depreciation is used to stimulate economic expansion by making certain types of real property more attractive to investors.
   Depreciation is allowed only for business property and income-producing property (which includes investment property).
   It is not allowed for inventory property or for a personal residence.

As it relates to annual income from a property, depreciation provides favorable tax relief as an allowable deduction that requires no current outlay of cash, as is necessary to deduct other expenses (such as property taxes and mortgage interest). In addition, depreciation is based on the total cost of improvements, including that portion paid for with borrowed funds (the leveraged portion).

Question 34

Depreciation Components

Answer 34

The depreciable basis of the property is the amount that may be depreciated.

For real property, it is generally the initial cost of the asset plus acquisition costs minus the value of the land.

Acquisition costs generally include such items as the buyer’s attorney’s fees, appraisal fees, survey fees, and title insurance costs.

Because land is not depreciable, this basis (total cost) must be allocated between the improvements (buildings, etc.) and the land, based on the respective values of each.

Question 35

Straight-Line Method

Answer 35

Depreciation is calculated using the straight-line method. An equal amount of depreciation is taken annually over the useful life of the asset. The Internal Revenue Service (IRS) has currently established useful asset life as 27.5 years for residential rental property and 39 years for nonresidential income-producing property.

The formula to compute straight-line method depreciation is:
depreciable basis ÷ 27.5 years (or 39 years) = annual depreciation

For example, assume that in 2010, a residential real estate investment property is purchased for $250,000, with a land value of $50,000. The depreciable basis is $200,000 ($250,000 sale price less the land value). What is the amount of the yearly depreciation deduction?
$200,000 depreciable basis ÷ 27.5 years = $7,273 annual depreciation deduction

Question 36

Tax on Gain at Time of Sale

Answer 36

In general, when income property is sold for cash, all gain or loss must be recognized (reported) immediately for income tax purposes.

The total realized gain is the difference between the net sale price (selling price less selling expenses) and the depreciated basis of the property.

The seller pays tax on the gain from the sale of real estate in the year the gain is collected.

Because of the tax consequences of the immediate recognition of gain, the installment sale method or a like-kind exchange may provide beneficial tax results.

Question 37

Installment Sale Method

Answer 37

Under the installment sale method, the gain is received over a number of years, and the seller recognizes the gain for tax purposes over the same period. The installment sale method relieves the seller of paying tax on gain not yet collected. Generally, it calls for the gain to be reported only as payments are actually received, with each payment treated as part profit and part recovery of investment in the property sold. If an installment sale results in a loss, however, the seller may not use the installment sale method to report the loss over a period of years for tax purposes. A qualified loss must be recognized (reported) in the year of sale. Because the IRS requirements regarding the installment sale method are complex, early tax counsel is mandatory.

Question 38

Like-Kind Exchange

Answer 38

Real estate investors can defer paying taxes by exchanging real property. The income tax is deferred, not eliminated. A like-kind exchange enables a taxpayer-investor to realize the benefits of investment and property appreciation immediately while paying taxes later. When the investor sells the property, the capital gain will be taxed.

To qualify as a tax-deferred exchange under Section 1031 of the Internal Revenue Code, real property must be exchanged for other real property (hence the term “like-kind”). However, it may be a different type of real property. For example, a multifamily complex can be exchanged for an office complex.

*Any additional capital or personal property included with the transaction to even out the value of the exchange is called boot.

The IRS requires tax on the boot to be paid at the time of the exchange by the party who receives it. Because exchanges are subject to a number of IRS rules that must be strictly adhered to, the transactions must be carefully structured, with early tax counsel mandatory. Personal residences and foreign property do not qualify.

Question 39

Tax Shelter

Answer 39

Tax shelter is a term that describes some of the advantages of owning real estate (or other investments). An investment is a tax shelter when it shields income or gain from payment of income taxes.

One of the features of a tax-sheltered real estate investment is depreciation. Depreciation is a key deduction because it reduces taxable income without involving a cash outlay. Depreciation protects at least a portion of income from tax and also may produce a tax loss, thus possibly creating additional tax sheltering of other income. Under the tax code, sheltering of income is restricted due to income classifications (active, portfolio, or passive).

Sound real estate investments depend primarily on the inherent productivity of a property, not on its tax aspects. A good real estate investment always combines positive cash flow (if income-producing property) with appreciation of property value. If a property declines in value in an amount equal to or greater than the depreciation deduction allowable for tax purposes, that property is not a tax shelter.

Question 40

Tax Shelter

Answer 40

The shielding of income or gain from payment of income taxes.

Question 41

Depreciation

Answer 41

A key deduction when calculating taxable income from investment property because it reduces taxable income without requiring a cash outlay.

Question 42

Summary of Important Points

Answer 42

Property taxes are payable for the current year on or after November 1. Unpaid property taxes become delinquent on April 1 of the following year.

Assessed value is the value of a property established for property tax purposes. Property owners use a three-step procedure to protest the assigned assessed value: (1) contact the county property appraiser, (2) appeal to the Value Adjustment Board, and (3) file a suit in court (certiorari proceeding).

The Value Adjustment Board is made up of five members: two county commissioners, one school board member, and two citizen members.

Immune properties consist of city, county, state, and federal government properties. Immune properties are not assessed and are not subject to taxation.

Exempt properties include property belonging to churches and nonprofit organizations. Exempt properties are subject to taxation, but the owner is released from the obligation.
Partially exempt property is subject to taxation, but the owner is partially relieved of the burden. Taxable value is determined by beginning with assessed value and subtracting appropriate exemptions.

Florida residents who hold title to a home in Florida and use the home as their permanent residence may homestead the property. Homeowners are entitled to a $25,000 homestead exemption from the assessed value of the home for city, county, and school board taxes.

Homesteaded properties with an assessed value of $75,000 or more are entitled to an additional $25,000 homestead exemption from city and county taxes (but not school board taxes).

An additional $500 exemption from the assessed value of homesteaded property is available to widows and widowers, legally blind persons, and nonveterans who are totally and permanently disabled. An additional $5,000 exemption is available to veterans who are at least 10% disabled by military service–connected misfortune.

Florida’s Green Belt Law shields agricultural property from higher tax assessments.

The Save Our Home amendment caps how much the assessed value of homesteaded property may increase each year to 3% annually or the CPI, whichever is less.

A mill is one one-thousandth of a dollar or one-tenth of a cent. Cities, counties, and school boards are capped at a basic real property tax rate of no more than 10 mills each.

Special assessments are one-time taxes levied on properties to help pay for a public improvement that benefits the property. A special assessment becomes a lien on the property.

Property taxes constitute a lien superior to all other liens on real property. Property taxes become a lien on January 1 of each year.

Property owners who itemize deductions may deduct interest, property taxes, and mortgage origination fees on a principal residence and second home, and interest on a home equity loan.

Deductions from taxable income on investment property include operating expenses (but not reserve for replacements), financing expense, and depreciation.

Depreciation is a means of deducting the cost of improvements to land over a specified time. The land itself is not depreciable. Depreciation is calculated using the straight-line method; an equal amount is taken annually over the useful life of the asset. The IRS has established the useful life of 27.5 years for residential rental property and 39 years for nonresidential income-producing property.