Chapter 18: Taxes Affecting Real Estate

Question 1

The Purpose and Use of Real Estate Taxes

Answer 1

The U.S. Constitution prohibits the federal government from levying property taxes. The Florida State Constitution limits the tax burden that can be placed on individual properties. The U.S. government relied mainly on income taxes as a source of revenue, while the state relied on state sales and use taxes to fund the cost of state government services.

Property tax revenue is collected and used by local government to provide public services such as law enforcement, fire protection, roads, schools, and so on. There are three primary taxing districts in Florida: city, county, and school board. In addition, there are numerous smaller special taxing districts that provide neighborhoods with certain types of services that are not provided to the entire area. These may include fire control districts, flood control districts, mosquito control districts, and others. A resident who lives outside of a taxing authority (i.e. outside of the city limits) would not have taxes levied for that taxing district.

Question 2

Tax Rates Expressed as Mills

Answer 2

A tax rate is the percentage at which an item is taxed. Property and school tax rates in Florida are expressed in the form of mills, or millage rates. The millage rate is the amount per $1,000 that is used to calculate the tax.

One mill is expressed as the decimal number .001m the equivalent of 1/1,000 of a dollar. There are ten mills in a penny, 100 mills in a dime, and one thousand mills in a dollar.

Mills are written as decimals rather than whole numbers, so it is necessary to convert the number of mills into decimal before calculating the real estate tax levy. Since mills are expressed in thousandths of a dollar, the decimal form of a mill uses three places to the right of the decimal point.

Question 3

Examples of mills

Answer 3

1 mill= .001
2 mills= .002
8 mills= .008
10 mills= .010 (or .01)
13 mills= .013 
20 mills= .020 (or .02)
When adding the decimal forms of mills, you must line up the decimal places.
6 mills + 12 mills = 18 mills
.006 + .012 = .018

Question 4

The 10 Mill Cap

Answer 4

The Florida Constitution limits local government tax rates to 10 mills for each taxing authority. This is referred to as the 10 mill cap.

The taxing body may select any rate necessary as long as it does not exceed the statutory limit. The state legislature has, from time-to-time, established rates that are lower than 10 mills, but they cannot be higher.

Question 5

Ad Valorem Tax

Answer 5

Real estate property taxes are ad valorem taxes, which means “according to value” and, therefore, are based on the value of the property. The term “property tax” is used interchangeable with the term “ad valorem tax.”

Question 6

Assessed Value

Answer 6

The county property appraiser in each county assesses all property for real estate tax purposes each year. The estimate of value that is determined by the county property appraiser is called the assessed value, which by law must be based on the concept of just value. Just value means “fair value” and has been interpreted by the courts in Florida to represent the market value of the property. To avoid duplication of effort, all taxing districts in the county must base their taxes on the assessed value that is determined by the county property appraiser.

Question 7

Tax Exemptions

Answer 7

An exemption is an amount allowed by law based on certain circumstances or status that reduces the amount that would otherwise be taxed. Taxable value is the assessed value of property minus the amount of any applicable exemptions.

Question 8

Taxable Value Determines Tax Liability

Answer 8

A property’s taxable value is the value used for determining the property owner’s tax liability.

Question 9

Tax Levy

Answer 9

The tax levy is the actual amount of tax payable by each property owner. The tax levy is not determined by the property appraiser’s office. The tax levy is determined by multiplying the taxable value by the applicable millage rates.

Question 10

TRIM Notice

Answer 10

After the county property appraiser determines the assessed value of the land and any improvements, the property owner is notified by mail of the assessment through a True Rate in Millage (TRIM) notice. The TRIM shows the assessed value, how much tax was paid last year, how much the taxes will be if no change is made in the budget, and how much the taxes will be if proposed changes are made in the budget.
The assessment is as of January 1st; the TRIM notice is generally mailed in August, and the budgets are not adopted until September. Since the budget has not been finalized as of the time in which the TRIM notice is mailed, the county property appraiser cannot provide the actual amount of the taxes that are due.

Question 11

Protesting the Tax Assessment

Answer 11

Not all property owners are willing to accept the assessed value that is determined by the county property appraiser. A protest procedure allows an owner, who disagrees with their assessment, to challenge the value, and hopefully, receive a lower assessment, thereby resulting in a lower tax bill.
Protesting a tax assessment is a three-step process.

Question 12

Protesting a tax assessment is a three-step process

Answer 12

1. Protest the assessment by requesting an informal conference with the county property appraiser. This conference can be conducted at any time throughout the year, but is usually not very effective until the assessment for the current tax period is known.
2. Within 25 days of the TRIM notice mailing date, file a request for a hearing before the Value Adjustment Board, which is composed of two county commissioners, one school board member, and two private citizens. One is a local homestead homeowner appointed by the county. The other citizen is appointed by the school board, and must be a business owner who occupies commercial space in the school district.
3. File an appeal with the District Court of Appeals (certiorari proceeding) within 60 days from the date of the hearing before the Value Adjustment Board.

Question 13

Real Estate Tax Exemptions and Limitations

Answer 13

Tax revenues pay the bulk of the cost of local government. The total revenue required is determined by the amount of the budget.

Any property owner who pays a reduced tax bill or none at all means that other properties will have to pay more in order for the budgeted amount to be realized. That does not say that all exemptions should be eliminated, but the effect of exemptions should be fully realized by licensees. An exemption is not truly an exemption; it is a shift of the responsibility for payment of the amount required to maintain government services from one party to another.

Question 14

For tax purposes, properties can be classified as follows:

Answer 14

• Full Payment: Those who pay a full tax levy
• Partially Exempt: those who pay a reduced levy because they qualify for an exemption that is less than 100%
• Fully Exempt: those who pay no real estate taxes because they qualify for a full exemption (100%)
• Immune: those who are not included in the taxable value because they are immune from paying taxes

Question 15

Exempt Property

Answer 15

Property owned by churches and nonprofit organizations that are engaged in charitable activities are assessed for tax purposes by receive a 100% exemption from payment of property taxes.

Question 16

Immune Property

Answer 16

Property owned by local, state, and federal governments are immune and, therefore, are not assessed, or subject to, taxation when used to provide government services. However, government-owned properties that are leased to private businesses, such as office buildings and warehouses, are subject to property taxes.

Question 17

Greenbelt Laws

Answer 17

Greenbelt laws provide farmers with favorable tax treatment if their property is used for agricultural purposes. Greenbelt laws assure that the property will continue to be assessed the same as other agricultural properties, thereby protecting against increased taxes caused by encroaching uses that would tend to raise property values.

Greenbelt laws limit the property assessment; they are not an exemption.

Question 18

Homestead Tax Exemption

Answer 18

Every person who owns and resides on real property in Florida on or before January 1st and makes the property his or her permanent residence may be eligible to receive a homestead exemption of up to a maximum of $50,000 of assessed value. The amount of the exemption is determined by the assessed value of the property.

Question 19

Basic (1st) Exemption

Answer 19

the first $25,000 applies to all property taxes, including school district taxes. All qualifying owners can deduct up to $25,000 from the assessed value of the property. For properties with an assessed value under $25,000, there are no ad valorem taxes.

Question 20

Additional (2nd) Exemption

Answer 20

an additional 2nd exemption, up to $25,000, applies to the assessed values greater than $50,000 for city and county taxes only (not school taxes). For assessed values over $50,000 but less than or equal to $75,000, the 2nd exemption is the amount over $50,000. For assessed values over $75,000, the 2nd exemption amount is capped at $25,000. Therefore, the property must have a minimum assessed value of $75,000 for the homeowner to receive the full $50,000 exemption.

Question 21

2nd Exemption qualify

Answer 21

To qualify for the homestead tax exemption, the property owner must file for the exemption with the county property appraiser between January 1st and March 1st each year. The property must be the owner’s primary residence. Filings that are made after March 1st apply to the following calendar year.

Question 22

Many counties automatically renew

Answer 22

previously filed homestead exemptions and mail postcards to homeowners to notify them of the renewal. If the use of the property or condition of the owner changes the exempt status of the property, Florida law required the owner to notify the county property appraiser. By not returning the car, the owner is stating that they claim entitlement to the exemption for another year; this constitutes a new filing.

Question 23

When is the card returned

Answer 23

Typically, returning the card to the appraiser’s office is done when the property owner no longer qualifies for the exemption. Penalties for failure to notify include being subject to the taxes exempted plus 15% interest, and a penalty of 50% of the taxes exempted. Any person who falsely claims homestead exemption may also be guilty of a first-degree misdemeanor.

Question 24

Individuals Eligible for Additional Exemptions

Answer 24

• Widows and widowers who have not remarried
• Blind persons
• Veterans of military service with at least a 10% military service-related disability

Question 25

widows and widowers who have not remarried

Answer 25

$500

Question 26

Blind persons

Answer 26

$500

Question 27

Veterans of military service with an at least a 10% military service-related disability

Answer 27

$5,000

Question 28

a nonveteran

Answer 28

may claim only the first two of these additional exemptions. Therefore, the maximum homestead tax exemption for nonveterans is $51,000.

Question 29

Permanently disabled

Answer 29

Any individual, veteran or not, who is totally and permanently disabled is entitled to 100% exemption from payment of property taxes. The person must be certified as totally and permanently disabled by two Florida licensed physicians, by the U.S. Department of Veterans Affairs, or by the Social Security Administration.

Question 30

Quadriplegic

Answer 30

Any person who is a quadriplegic is 100% exempt from payment of real estate taxes.

Question 31

Additional special exemption

Answer 31

Any person who is a paraplegic, hemiplegic, or has some other total and permanent disability and must use a wheelchair or in addition to the permanent disability is also blind, is 100% exempt from payment of real estate taxes.

Question 32

The Florida State Constitution allows

Answer 32

counties and cities to adopt legislation that adds up to an additional $50,000 to the homestead tax exemption for specified property owners. To qualify for this exemption, the city or county must first authorize the additional benefit. To qualify, a homeowner must be 65 years of age or over, and have a household income of $20,000 or less. This income limitation is adjusted annually by the percentage change in the average cost of living index.

To calculate the tax to be levied against a property, the amount of all exemptions to which an owner is entitled is subtracted (or deducted) from the total tax liability.

Question 33

Save Our Homes Assessment Limitation

Answer 33

Beginning with the calendar year 1995, the assessed value of homestead property is limited as to the amount of increase the county property appraiser may assign to the lesser of 3%, or the percentage change in the Consumer Price Index (CPI). The purpose of this assessment limitation legislation was to limit the increase in the amount of tax dollars a homeowner could be assessed in any given year and to protect against inflationary increases that could force property owners to sell because of an increased tax burden.

Question 34

The tax rolls show two different values for homestead property

Answer 34

One value is the assessed value that is based on just value as determined by the county property appraiser; the other is the adjusted value that reflects the change in value that is authorized by this legislation. The taxable value is the lesser of these two.

Question 35

Limitation Removed Upon Sale of Property

Answer 35

When homestead property is sold, this limitation is removed and the new owner will be assessed at the full taxable value.

Question 36

Non-Homestead Property Assessment Cap

Answer 36

As of January 1, 2009, the annual cap on non-homesteaded properties is 10%. This cap applies to second homes, commercial properties, and unimproved land, but does not apply to school district taxed. The assessment cap is applied automatically and does not require an application be filed.

Question 37

Save Our Homes Benefit Portability to a New Residence

Answer 37

Homeowners are allowed to transfer some or all off the Save Our Homes benefit to a new residence that is located anywhere in the state of Florida.

Question 38

Calculating the Tax Levy

Answer 38

To calculate the tax to be levied against a property, the amount of all exemptions to which an owner is entitled is subtracted (or deducted) from the total tax liability.

1. Identify the stated info needed to calculate the tax levy
2. Determine which homestead exemptions apply
3. Determine the total tax liability
4. Calculate the first tier exemption, applying all three taxing authorities to the basic exemption ($25,000) plus any additional special exemptions that apply ($500 for a widow)
5. Calculate the second tier exemption, applying only the millage rates for county and city taxing authorities to the 2nd exemption (which is $25,000 since the assessed value is over $75,000).
6. Subtract the first and second tier deduction amounts from the total tax liability to determine the total tax levy.

Question 39

Calculating Special Assessments

Answer 39

Special assessments are tax levies that are used to pay for specific public improvements that add value to the property. Special assessment liens may be for paving a street, connecting property to a central water or sewer system, street lighting, and so on.

Special assessments that have been announced but not completed are called pending special assessment liens. Those that have been completed are called certified special assessment liens. The seller of the property generally pays a completed special assessment lien since the value of the property was improved and can be recaptured in the sales price. A potential buyer normally pays for a pending special assessment lien since he or she ultimately receives the benefit of the improvement.

Question 40

Are special assessments an ad valorem tax

Answer 40

Special assessments are not an ad valorem tax. The cost of the improvement is apportioned among the property owners who receive the benefit. Often the city or county agrees to pay a share of the cost, and the balance is allocated to the property owners. The cost to each property owner is based on the degree of benefit received, not the value of the property.

Question 41

What are the two methods of allocating the cost of the improvement used?

Answer 41

Pro rata share

Front-foot basis

Question 42

Pro rata share

Answer 42

is the cost divided equally by the number of property owners who benefit from the improvement. This method is often used for utility and sewer line installations, and for street lighting.

Question 43

Front-foot basis

Answer 43

is the cost of the improvement that is expressed as a cost per front-foot, and is allocated among the property owners on the basis of the number of feet the owner has along the street. This method is used when streets are being paved or sidewalks are being installed.

Question 44

When lot dimensions are being quoted

Answer 44

the first number given is always the length along the street. Side dimensions follow the street dimension.

Question 45

Tax Levy due date

Answer 45

Real estate taxes are assessed on an annual basis, from January 1st to December 31st. Property taxes are due to payable as of March 31st of the following year.

Question 46

Tax Levy Discount Schedule

Answer 46

A discount applies for early payment prior to the March due date. If the payment is not made prior to March, the property owner must pay the full amount of the property tax. The discount schedule is as follows:

Month of Payment	Discount
November	4%
December	3%
January	2%
February	1%

Question 47

Delinquent Property Taxes

Answer 47

If the property owner does not pay the property taxes before April 1st of the year following the assessment, the tax becomes delinquent. Delinquent tax bills are subject to a late charge. During the month of May, a list of all delinquent tax bills is advertised in a newspaper with countywide distribution in the county where the property is located. Each delinquent tax bill is available for purchase by an investor at a tax certificate sale. The advertisement specifies the place, date, and time for the sale.
A real estate property tax certificate represents a lien on real property. The cost to purchase a tax certificate, which includes the amount of the unpaid tax and interest plus advertising cost, is listed beside each parcel in the advertisement.
Real estate property taxes are used to support the cost of local government services. If owners do not pay their taxes when due, the taxing district will not receive all of the money that was anticipated in the budget. This shortage could interfere with the delivery of those government services.

Question 48

Tax Certificate Sale

Answer 48

The tax certificate sale is a public auction of each tax certificate. The proceeds of the sale are paid to the tax collector.

Question 49

Tax Certificate Sale Bidding

Answer 49

During the public auction investors make bids on the tax certificate based on the interest rate that he or she wishes to receive in exchange for paying the gross taxes, interest, and associated sales costs of the tax certificate. Bidding for the tax certificate opens at 18% interest, and sells to the lowest bidder (i.e. the person who bids the lowest interest rate).
If no bids are received for a tax certificate, the county is issued the tax certificate at 18% interest.

Question 50

Redemption of a Tax Certificate

Answer 50

Within two years, the property owner can redeem the tax certificate to retain ownership of the property. To do this, the property owner must pay the amount of the tax certificate plus interest at the rate at which the certificate was sold, calculated from the month of sale to the month of redemption. Payment is made to the county tax collector; the tax collector then pays the holder of the tax certificate.

Question 51

If the property owner does not redeem the tax certificate

Answer 51

within two years from the date in which the tax certificate was sold, the certificate holder can apply for a tax deed. That triggers a public sale of the property at public auction. The proceeds of which are used to pay the holder of the tax certificate. The holder of the tax certificate bids the amount due from the property owner at auction, and if no bids higher are received, the holder of the certificate receives the title to the property.

The life of a tax certificate is seven years from the date of issuance. If the holder of the certificate does not apply for a tax deed within this period, the certificate is null and void.

Question 52

Federal Income Tax Effect on Homeownership

Answer 52

The impact of federal income taxes is an important consideration in all real estate transactions. Major changes have been made in recent years that have altered the benefits of ownership of real estate. Although brokers and sales associates are expected to be knowledgeable regarding taxes, they are cautioned not to attempt to advise members of the public regarding tax matters. If a licensee believes a party’s actions may cause financial loss or difficulty, he or she should advise the party to seek the advice of a qualified expert.
Tax benefits that apply to homeowners are different from those for investors but both receive certain advantages under the law.

Question 53

Tax Deductions on federal income tax effect on homeownership

Answer 53

Tax deductions generally serve to reduce the income that is able to be taxed, thus reducing the amount of tax to be paid. Homeowners can deduct the following:
- Real estate property tax deduction: real estate property taxes are deductible as an expense when calculating federal income taxes for all homeowners who file itemized returns.
- Mortgage interest deduction: beginning in 2018, taxpayers can deduct mortgage interest of up to $750,000 of acquisition indebtedness (previously $1,000,000). Acquisition indebtedness is mortgage debt incurred to acquire, construct, or substantially improve a principal or secondary residence.
Note: The deduction for home equity interest was eliminated beginning in 2018.

Question 54

Exclusion of Gain Upon Sale of a Principal Residence

Answer 54

The Taxpayer Relief Act of 1997 established new tax treatment for homeowners upon the sale of a principal residence. Under the 1997 Tax Act, married couples filing jointly, who have owned and used the property as a principal residence for at least two of the previous five years prior to sale, may exclude up to $500,000 of gain on the sale from taxation. Single homeowners may exclude up to $250,000 of gain. This exclusion from gain can be used over and over during the taxpayer’s life, but no more often than once every two years.

A recreational vehicle or a boat qualifies as a principle residence, as long as it has a kitchen, and sleeping and bath facilities. A taxpayer cannot have more than one principal residence at the same time.

If a principal residence is sold at a loss to the homeowner, the loss is not tax deductible.

Question 55

IRA Withdrawal for First-Time Homebuyers

Answer 55

Homebuyers under the age of 59 ½ may take a distribution of up to $10,000 from their IRA without paying the normal 10% additional tax penalty. The distribution must be used to buy, build, or rebuild a first home, or pay reasonable settlement, financing or closing costs. If both spouses are first-time homebuyers, each spouse can receive distributions up to $10,000 without penalty.

A first-time homebuyer is defined as a homebuyer who has no present interest in a main home during the 2-year period ending on the date of acquisition of the home that the distribution is being used to buy, build or rebuild. If married, both spouses must also meet this no-ownership requirement.

Question 56

Homeowner’s Insurance Policy

Answer 56

A homeowner’s insurance policy provides property insurance and personal liability coverage. Contents coverage is generally included up to specified limits. Homeowners can select additional coverage by paying additional premiums. Mortgage lenders require homeowner insurance to be maintained, and for the mortgage company to be names in the policy under a loss payable clause.

The actual form of the homeowner’s policy will vary according to the type of property that is insured, the insurance company that issues the policy, and the needs of the insured. Commonly, insurance policies contain exclusions of coverage from certain types of loss.

Question 57

In Florida, homeowners can encounter problems

Answer 57

in obtaining homeowners insurance policies. The Citizen’s Property and Casualty Association (CPCA; formerly the Residential Property and Casualty Joint Underwriting Association) was established as a state-operated pool in order to enable homeowners to obtain insurance if unobtainable through other insurance sources.

Florida law requires the CPCA policies to be priced higher than the average rates for homeowner policies because of the risk due to location or other factors associated with some property.

Question 58

Flood Insurance

Answer 58

Federal lending laws require any federally regulated lender to have a property covered by flood insurance when used as collateral for a loan if the property is located within certain designated flood hazard areas.

It is important to remember that homeowner insurance policies do not cover flood losses.

Question 59

Multiple Insurance Policies

Answer 59

If an owner obtains coverage from two or more insurance companies on the same property, each company would only pay a proportional (pro-rata) share of a covered loss. The property owner cannot collect more than the amount of the loss by attempting to collect the total loss from two or more insurance companies.