Unit 18: Taxes Affecting Real Estate

Question 1

True/False Ad valorem means according to cost.

Answer 1

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

Question 2

True/False Property taxes are paid in arrears.

Answer 2

True. Property taxes are not due until November 1 and do not become delinquent until April 1 of the following year.

Question 3

True/False The first step in the property tax protest procedure is to file an appeal with the Value Adjustment Board.

Answer 3

False. The first step in the property tax protest procedure is to seek an adjustment by contacting the county property appraiser.

Question 4

True/False Property owned by nonprofit organizations is classified as immune property.

Answer 4

False. Property belonging to churches and nonprofit organizations is classified as exempt property.

Question 5

True/False Government buildings are immune properties—that is, government buildings are NOT subject to taxation.

Answer 5

True. Immune properties are government buildings (city, county, state, and federal government properties) plus special categories that have been made immune by a statute or ordinance, such as municipal airports. Immune properties are not even assessed and are not subject to taxation.

Question 6

True/False Floridians who have a homestead with an assessed value above $75,000 and who reside on the property as their permanent legal residence are eligible for a $50,000 homestead tax exemption.

Answer 6

True. Homeowners are entitled to a $25,000 homestead exemption from the assessed value of the home for city, county, and school board taxes. Homesteaders with assessed values greater than $75,000 are entitled to an additional $25,000 exemption from city and county taxes (but not school board taxes).

Question 7

True/False The just value of homesteaded property in Florida may increase a maximum of 3% annually.

Answer 7

True. The just value of homesteaded property may be increased by the lesser of 3% annually or the percentage change of the Consumer Price Index.

Question 8

True/False The purpose of Florida’s Green Belt Law is to protect coastal property from commercial development.

Answer 8

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

Question 9

True/False Homeowners who have had the homestead exemption on their current home in the preceding year can transfer their SOH benefit to a new home.

Answer 9

True

Question 10

True/False Property taxes become a lien on January 1 and are junior to mortgage liens.

Answer 10

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

Question 11

The city is petitioned to pave the streets in a neighborhood. The paving cost is $32 per foot, and the city is to pay 25% of the cost. There are homes on both sides of the streets to be paved. If the lot frontage on the street is 105 feet, the special assessment for the street paving for this homeowner is

A) $1,260.
B) $2,520.
C) $3,360.
D) $630.

Answer 11

A) $1,260. 105 front feet × $32 per foot = $3,360; $3,360 × .75 (owner’s share of cost is 100% – 25%) = $2,520. $2,520 ÷ 2 (one-half of the street paving cost) = $1,260.

Question 12

True/False The maximum rate of interest paid on a tax certificate is based on the prior year’s Consumer Price Index.

Answer 12

False. The bidding on tax certificates starts at 18% and goes down; therefore, the maximum rate paid on a tax certificate is 18%.

Question 13

True/False Special assessments are levied according to the value of a property.

Answer 13

False. Special assessments are one-time taxes levied on properties to help pay for public improvements that benefit the property. 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 14

True/False Mortgage origination fees (points) paid on a refinance mortgage loan are deductible in the year they are paid.

Answer 14

False. Points paid when refinancing a loan must be deducted over the life of the loan.

Question 15

True/False The exclusion of gain from the sale of a principal residence is up to $500,000 of gain for married couples who file a joint return.

Answer 15

True. The exclusion of gain from the sale of a principal residence is up to $250,000 of gain, or up to $500,000 of gain for married couples filing a joint return, provided the taxpayer-homeowner had occupied the residence for at least two of the last five years.

Question 16

A homeowner originally purchased a new home for $325,000. During the period of ownership, the homeowners spent $25,000 in capital improvements. The homeowners sold the home 15 years later for $449,900. The homeowners paid a brokerage fee of 5% of the sale price and paid out-of-pocket closing costs totaling $3,250. What is the homeowners’ capital gain from the sale?

A) $125,645
B) $96,650
C) $77,405
D) $74,155

Answer 16

D) $74,155. Solution: $449,900 sale price × .05 = $22,495 broker commission. $449,900 – $22,495 – $3,250 closing costs = $424,155 amount realized from sale. $325,000 purchase price + $25,000 capital improvements = $350,000 adjusted basis. $424,155 – $350,000 = $74,155 capital gain.

Question 17

True/False When purchasing real estate in the U.S. from a foreign seller, the purchaser is required to withhold up to 15% of the amount realized on the sale.

Answer 17

True. Persons purchasing real property in the U.S. from foreign sellers are required to withhold up to 15% of the amount realized on the sale.

Question 18

True/False A short-term capital gain is the sale of an asset held for less than 12 months.

Answer 18

True. Capital gains (and losses) are either short term (the asset is held for less than 12 months) or long term (the asset is held for more than 12 months).

Question 19

True/False The IRS useful asset life of nonresidential income-producing property is 27.5 years for calculating depreciation allowance

Answer 19

False. The useful life of nonresidential income-producing property is 39 years. The useful life of residential rental property is 27.5 years.

Question 20

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.

Answer 20

Depreciation

Question 21

Deductions from taxable income on investment property include

Answer 21

operating expenses (but not reserve for replacements), financing expense, and depreciation.

Question 22

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).

Answer 22

Assessed value

Question 23

True/False 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.

Answer 23

True

Question 24

Which statement is FALSE regarding property taxes?

A) Property taxes become a lien on all real estate in Florida on January 1 each year.
B) Property taxes for the previous year are due on November 1.
C) Ad valorem tax means according to value.
D) The county property appraiser assesses all real property within the county.

Answer 24

B) property taxes for the previous year are due on November 1. Property taxes are due November 1 for the current year. Property taxes are paid in arrears, meaning that although they are assessed on January 1, the bill is not due until November 1 of the same year.

Question 25

Which item is NOT a deductible expense for an income-producing property?

A) Depreciation
B) Reserve for replacement
C) Mortgage interest
D) Hazard insurance

Answer 25

B) reserve for replacement. Reserve for replacement is not a cash expense and therefore is not deductible.

Question 26

A homesteaded single-family residence has an assessed value of $92,800. The owner is a 25% service-disabled veteran who is 75 years of age. What is the total homestead tax exemption?

A) $55,000
B) $30,000
C) Totally tax exempt
D) $50,500

Answer 26

A) $55,000. The assessed value exceeds $75,000. The solution is $50,000 homestead exemption + $5,000 disability = $55,000 total homestead tax exemption.

Question 27

If a married couple who files jointly realizes a profit from the sale of their home that exceeds $500,000, what is the result?

A) Up to $125,000 of the excess profit will be taxed as a capital gain.
B) The excess gain will be taxed at the current applicable capital gains rate.
C) The homeowners will not pay capital gains tax if at least one of them is older than 55.
D) The excess gain will be taxed at the homeowner’s income tax rate.

Answer 27

B) excess gain will be taxed at the current applicable capital gains rate. Gain is not taxed up to $500,000.

Question 28

Which property is exempt from property taxes?

A) Air Force base
B) Florida Museum of Natural History
C) Federal Reserve building
D) Church

Answer 28

D) church. Exempt properties include property belonging to churches and nonprofit organizations. Immune properties are city, county, state, and federal government buildings.

Question 29

Homeowners originally purchased a new home for $225,000. During the period of ownership, the homeowners spent $27,500 in capital improvements. When the homeowners sold the home 15 years later for $359,900, they paid a brokerage fee of 5% of the sale price and paid out-of-pocket closing costs totaling $2,550. What is the homeowners’ capital gain from the sale?

A) $114,355
B) $197,500
C) $86,855
D) $48,045

Answer 29

C) $86,855. $359,900 sale price ×.05 = $17,995 broker commission. $359,900 – $17,995 – $2,550 closing costs = $339,355 amount realized from sale. $225,000 purchase price + $27,500 capital improvements = $252,500 adjusted basis. $339,355 – $252,500 = $86,855 capital gain.

Question 30

An investor purchased a commercial building in January for $524,900. The contract specified that 80% of the purchase price be allocated to the structure, and the remaining purchase price be allocated to the land. What is the annual depreciation deduction? (Round to nearest dollar.)

A) $15,270
B) $10,767
C) $3,817
D) $13,459

Answer 30

B) $10,767. $524,900 × .80 = $419,920 building. $419,920 ÷ 39 years = $10,767.

Question 31

The just value of a homesteaded property in Leon County is $425,800. The Consumer Price Index for the previous year was 2%. The property’s just value increased the maximum allowed under the Save Our Home Amendment. By what percentage did the just value increase?

A) 3%
B) 2%
C) Percentage increase approved by the county commissioners
D) Percentage passed by the residents of Leon County

Answer 31

B) 2%. The just value of homesteaded property may be increased either 3% annually (based on the assessed value for the previous year) or by the percentage change of the Consumer Price Index for the preceding year, whichever is less.

Question 32

If a request for a property tax adjustment is denied, what is the property owner’s next step?

A) File a petition with the Value Adjustment Board
B) Contact the county tax collector or a representative
C) File a certiorari proceeding with the county court
D) Sue the county property appraiser

Answer 32

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

Question 33

Tax advantages of homeownership do NOT include

A) a tax deduction of property taxes paid.
B) exclusion of gain from the sale of a principal residence up to $500,000 for a single adult.
C) a tax deduction of the interest paid on a home equity loan that does not exceed $100,000.
D) up to $10,000 in penalty-free withdrawals from an IRA if used as a down payment on a personal residence for first-time homebuyers.

Answer 33

B) exclusion of gain from the sale of a principal residence up to $500,000 for a single adult. The IRS allows an exclusion of up to $250,000 of gain ($500,000 for married couples filing a joint return) realized on the sale of a principal residence.

Question 34

A development company purchased 1,000 acres of land from a foreign seller for $2,850,000. Federal law requires the buyer to withhold from the seller and pay to the IRS approximately

A) $427,500.
B) $28,500.
C) $42,750.
D) $285,000.

Answer 34

A) $427,500. The IRS requires that buyers withhold 15% of the gross sale price. The buyer must report the purchase and pay the IRS the amount withheld.

Question 35

The Value Adjustment Board is composed of

A) two school board members and three county commissioners.
B) the city manager, property appraiser, and three other elected officials.
C) three school board members and two county commissioners.
D) one school board member, two county commissioners, and two citizen members.

Answer 35

D) one school board member, two county commissioners, and two citizen members. The board is made up of five members.