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2 Understand the difference between general and specific liens Describe Ad Valorem taxes and the governmental bodies that impose them Describe special assessment taxes and why they are in place Identify the two components of depreciation and the basis of depreciation Understand installment sales and how they are determined Identify capital gain on home sales and the types of capital gain Comprehend various types of foreclosures Understand how to delay a foreclosure Identify the obligations required of a buyer in a foreclosure Objectives

3 Understand the difference between general and specific liens Describe Ad Valorem taxes and the governmental bodies that impose them Describe special assessment taxes and why they are in place Identify the two components of depreciation and the basis of depreciation Understand installment sales and how they are determined Identify capital gain on home sales and the types of capital gain Comprehend various types of foreclosures Understand how to delay a foreclosure Identify the obligations required of a buyer in a foreclosure Objectives

4 Understand the difference between general and specific liens Describe Ad Valorem taxes and the governmental bodies that impose them Describe special assessment taxes and why they are in place Identify the two components of depreciation and the basis of depreciation Understand installment sales and how they are determined Identify capital gain on home sales and the types of capital gain Comprehend various types of foreclosures Understand how to delay a foreclosure Identify the obligations required of a buyer in a foreclosure Objectives

5 Understand the difference between general and specific liens Describe Ad Valorem taxes and the governmental bodies that impose them Describe special assessment taxes and why they are in place Identify the two components of depreciation and the basis of depreciation Understand installment sales and how they are determined Identify capital gain on home sales and the types of capital gain Comprehend various types of foreclosures Understand how to delay a foreclosure Identify the obligations required of a buyer in a foreclosure Objectives

6 Understand the difference between general and specific liens Describe Ad Valorem taxes and the governmental bodies that impose them Describe special assessment taxes and why they are in place Identify the two components of depreciation and the basis of depreciation Understand installment sales and how they are determined Identify capital gain on home sales and the types of capital gain Comprehend various types of foreclosures Understand how to delay a foreclosure Identify the obligations required of a buyer in a foreclosure Objectives

7 We will be discussing the 3 types of liens; General, Specific and Ad Valorem. TRUE FALSE A B

8 We will be discussing the 3 types of liens; General, Specific and Ad Valorem. TRUE FALSE A B

9 Understand the difference between general and specific liens Describe Ad Valorem taxes and the governmental bodies that impose them Describe special assessment taxes and why they are in place Identify the two components of depreciation and the basis of depreciation Understand installment sales and how they are determined Identify capital gain on home sales and the types of capital gain Comprehend various types of foreclosures Understand how to delay a foreclosure Identify the obligations required of a buyer in a foreclosure Objectives

10 Understand the difference between general and specific liens Describe Ad Valorem taxes and the governmental bodies that impose them Describe special assessment taxes and why they are in place Identify the two components of depreciation and the basis of depreciation Understand installment sales and how they are determined Identify capital gain on home sales and the types of capital gain Comprehend various types of foreclosures Understand how to delay a foreclosure Identify the obligations required of a buyer in a foreclosure Objectives

11 Understand the difference between general and specific liens Describe Ad Valorem taxes and the governmental bodies that impose them Describe special assessment taxes and why they are in place Identify the two components of depreciation and the basis of depreciation Understand installment sales and how they are determined Identify capital gain on home sales and the types of capital gain Comprehend various types of foreclosures Understand how to delay a foreclosure Identify the obligations required of a buyer in a foreclosure Objectives

12 Understand the difference between general and specific liens Describe Ad Valorem taxes and the governmental bodies that impose them Describe special assessment taxes and why they are in place Identify the two components of depreciation and the basis of depreciation Understand installment sales and how they are determined Identify capital gain on home sales and the types of capital gain Comprehend various types of foreclosures Understand how to delay a foreclosure Identify the obligations required of a buyer in a foreclosure Objectives

13 Section 1 LIENS

14 Liens A lien is a claim against property, made in order to secure payment of a debt.  The lien makes the property collateral against monies or services owed to another person or entity.  Collateral is an asset that has been pledged by the recipient of a loan as security on the value of the loan. If the recipient of the loan is unable to repay the loan, the lender will look to the collateral as a source for payment on the debt.

15 Liens Liens are of two kinds: general and specific.  In addition, there are voluntary and involuntary liens.  Voluntary liens are imposed by a contract between the creditor and the debtor (e.g., when a lender holds a mortgage on a property, it has a lien against the home).  Involuntary liens are imposed by law, such as when a lien is placed on a property for outstanding taxes and other unpaid debts.

16 Liens An encumbrance is a claim against, limitation on, or liability against real estate.  Encumbrances include liens, deed restrictions, easements, encroachments, and licenses.  An encumbrance can restrict the owner's ability to transfer title to the property, or it can lessen the property’s value. It represents some right or claim of another to a portion of the property or to the use of the property.  Liens may be voluntary or involuntary, statutory or equitable, general or specific.

17 A/an ______ is a claim made against a property by someone in order to secure payment of a debt. B C D A Lien Tax Back Payment Encumbrance

18 A/an ______ is a claim made against a property by someone in order to secure payment of a debt. B C D A Lien Tax Back Payment Encumbrance

19 Looking at Tax Liens On January 1, when the assessment roll takes effect for the next tax year, a lien is placed on all assessed real property in the amount of the tax due.  Taxes on personal property also may be liens on secured real property if they are listed with or cross-referenced to real property on the secured assessment roll.  The assessor determines whether the real property is sufficient security for the personal property tax. At the taxpayer’s request, real property owned by the taxpayer elsewhere in the county also may secure the personal property tax lien.  Before the lien date, the assessor issues and records a certificate to that effect.

20 Looking at Tax Liens The real and personal property are cross-referenced in the tax rolls. The property tax lien takes priority over all others, with some exceptions. The exceptions are for the following:  a judgment lien creditor who acquired a right, title, or interest, prior to the recording of the property tax lien;  holders of a security interest or mechanic’s lien;  a person or entity who bought the property or took title to it without knowledge of the lien

21 Liens are of two kinds General Liens Liens Specific Liens

22 IRS Tax Liens Estate & Inheritance Tax Liens Corporation Franchise Tax Liens General Liens A judgment lien is a court ordered lien that is placed against the home or property when the homeowner simply fails to pay a debt. When the homeowner has a judgment lien against his or her home and wants to sell it, the judgment lien has to be paid in full before the home or property can be sold. Judgment liens can be placed against the property for a variety of reasons such as unpaid credit card bills, utility bills, department store bills, landscaping or home improvement bills, and just about any bill that the homeowner has failed to pay in a reasonable amount of time. Any bill that can cause an individual to end up in court can result in a judgment lien.

23 Failing to pay property taxes would invoke and Voluntary Lien against the property. TRUE FALSE A B

24 Failing to pay property taxes would invoke and Voluntary Lien against the property. TRUE FALSE A B

25 Judgement LiensIRS Tax Liens Corporation Franchise Tax Liens General Liens Estate tax liens help protect the government's interest in collecting federal estate tax liabilities. A general estate tax lien arises when a decedent's estate fails to pay its estate tax liability. The general estate tax lien attaches to all of the property that is included in the decedent's gross estate. The decedent's gross estate includes all property owned at death, plus certain other assets over which the decedent had sufficient control. The lien does not attach to property that is outside of the decedent's gross estate or property which (as part of the gross estate) is used to pay court-approved estate expenses. The general estate tax lien is enforceable for a period of ten years following the decedent's death.

26 Estate & Inheritance Tax Liens Judgement LiensIRS Tax Liens General Liens State governments generally levy a corporation franchise tax on corporations as a condition of allowing them to do business in the state. Such a tax is a general statutory involuntary lien on all real and personal property owned by the corporation.

27 Corporation Franchise Tax Liens Estate & Inheritance Tax Liens Judgement Liens General Liens In the United States, a federal tax lien may arise in connection with any kind of federal tax, including but not limited to income tax, gift tax, or estate tax. Internal Revenue Code section 6322 provides: Sec Period of Lien. “Unless another date is specifically fixed by law, the lien imposed by section 6321 shall arise at the time the assessment is made and shall continue until the liability for the amount so assessed (or a judgment against the taxpayer arising out of such liability) is satisfied or becomes unenforceable by reason of lapse of time.”

28 Which of the following is a general lien? B C D A Property tax lien Real estate tax lien Judgment lien Mortgage lien

29 Which of the following is a general lien? B C D A Property tax lien Real estate tax lien Judgment lien Mortgage lien

30 Real Estate Tax Liens Mortgage Liens Mechanic’s Liens Utility Liens Bail Bond Liens Some states are “tax deed only” states, which gives their governments access to immediate funds to function properly and perform their normal operations. If an owner does not pay property taxes, the property becomes tax defaulted and the owner has five years to redeem it. The owner of the property has two choices: redeem the property and pay a fortune in taxes and interest, or not redeem the property and let the government sell it. Unlike tax deeds, tax lien certificates let the investor earn a high rate of interest on the delinquent property taxes in addition to collecting the property if the owner fails to redeem. Tax lien certificates are a low-risk, high-return alternative to the constantly changing economy. Buying tax lien certificates is probably the best- kept secret in investing. It is safe and simple to do. Specific Liens

31 Property Tax Lien Mortgage Liens Mechanic’s Liens Utility Liens Bail Bond Liens Unlike personal debts, tax liens on real estate occur when property owners become responsible for payment even if the tax obligation was incurred by a prior owner. Depending on the law of the state or jurisdiction, the owner of the property may also be personally liable for payment of the taxes. Payment of a tax lien may occur through various methods:  Payment may be made directly by the property owner or, in many cases, indirectly by the mortgage holder using an escrow account.  If a property is sold by the owner prior to tax foreclosure by the government body, the tax lien (which is generally discovered as part of a title search) is usually paid from the sale proceeds as part of closing costs. Specific Liens

32 Real Estate Tax Liens Property Tax Lien Mechanic’s Liens Utility Liens Bail Bond Liens A mortgage lien is a legal claim against a mortgaged property that must be paid or assumed when the property is sold. The person who holds the lien against the property can claim the property if the loan defaults. The mortgage lien typically belongs to the lender in order to secure the mortgage loan. Specific Liens

33 Mortgage Liens Real Estate Tax Liens Property Tax Lien Utility Liens Bail Bond Liens A mechanic's lien is a security interest in the title to property for the benefit of those who have supplied labor or materials that improve the property. The lien exists for both real property and personal property. In the realm of real property, it is called by various names including, generically, construction lien. It is also called a materialman's lien or supplier's lien when referring to those supplying materials, a laborer's lien when referring to those supplying labor, and a design professional's lien when referring to architects or designers who contribute to a work of improvement. In the realm of personal property, it is also called an artisan's lien. Mechanic’s liens on property in the United States date from the 1700s. Specific Liens

34 Mechanic’s Liens Mortgage Liens Real Estate Tax Liens Property Tax Lien Bail Bond Liens Municipalities often have the right to impose a specific, equitable, involuntary lien on the property of an owner who refuses to pay bills for municipal utility services. Specific Liens

35 Utility Liens Mechanic’s Liens Mortgage Liens Real Estate Tax Liens Property Tax Lien A bail bond lien happens when a family member needs to be bailed out of jail and a relative puts up his or her home for collateral. The bail company will place a bail bond against the relative’s property, which works as an insurance policy for the court. If the individual does not show up for the court date, the bail is paid to the court through the bail bond company. In most cases, bail bond liens are secured with a deed of trust, allowing the bail bond company to foreclose the property if the bond is not repaid. Specific Liens

36 A ___________is a security interest in the title to property for the benefit of those who have supplied labor or materials that improve the property. B C D A Mechanic's lien Judgment lien Mortgage lien Property tax lien

37 A ___________is a security interest in the title to property for the benefit of those who have supplied labor or materials that improve the property. B C D A Mechanic's lien Judgment lien Mortgage lien Property tax lien

38 Case Study: Mechanic's Lien - RTBH, Inc. v. Simon Property Group Dick's Sporting Goods, Inc. entered into a lease with Simon Property Group for a property that Simon owned at a mall. Dick's planned to build a new store on the property, which would required the deconstruction of the existing units. Simon agreed to pledge to finish the construction of the building if Dick's failed to complete it. Dick's used S.C. Nestel, Inc. as the general contractor for the project. McAndrews was then subcontracted by Nestel to do the window and glass work. Throughout the construction process, a representative from McAndrews was in contact with representatives from Dicks' and Nestel, but not with anyone from Simon. The store was eventually completed without the need for Simon to intervene. Nestel refused to pay McAndrews for the work and, instead, filed a complaint for damages against them. McAndrews filed a counterclaim against both Nestel and Simon stating that there was a valid mechanic's lien on the property. Simon made a motion for a partial summary judgment. They claimed there was no mechanic's lien on their interest of the property.

39 What is the issue in this case? Case Study: Mechanic's Lien - RTBH, Inc. v. Simon Property Group A B C D Whether or not McAndrews is entitled to payment for their services Whether or not Simon is responsible for the improvements provided by McAndrews How much McAndrews is entitled to receive None of the answers shown

40 What is the issue in this case? Case Study: Mechanic's Lien - RTBH, Inc. v. Simon Property Group A B C D Whether or not McAndrews is entitled to payment for their services Whether or not Simon is responsible for the improvements provided by McAndrews How much McAndrews is entitled to receive None of the answers shown

41 McAndrews wanted to be paid for their services. However, Simon claimed they were targeting the wrong people. Simon was not necessarily claiming that McAndrews was not owed money, only that they were not responsible for it. How, do you think, the court ruled in this case? Case Study: Mechanic's Lien - RTBH, Inc. v. Simon Property Group A B As the owners of the property, Simon Group is responsible for any lien associated with that property Simon did not consent to the improvements, so the lien does not apply to their interest

42 McAndrews wanted to be paid for their services. However, Simon claimed they were targeting the wrong people. Simon was not necessarily claiming that McAndrews was not owed money, only that they were not responsible for it. How, do you think, the court ruled in this case? Case Study: Mechanic's Lien - RTBH, Inc. v. Simon Property Group A B As the owners of the property, Simon Group is responsible for any lien associated with that property Simon did not consent to the improvements, so the lien does not apply to their interest

43 The Effects of Liens on Title  Unlike personal debts, tax liens "run with the land" in that a property owner becomes responsible for payment even if the tax lien obligation was incurred by a previous owner.  Depending on the local state and county law, the new owner of the property may also become personally liable for any and all payment of the tax lien.  So, when a property owner doesn't pay his property taxes, the county government puts a lien on the property, making it a tax lien property.  The county government will then look for investors to pay the property owner’s back taxes owed, so that the local government can continue to run on budget.

44 The previous owner of the laundromat failed to pay his municipal property taxes for 3 years / $3800. The new owner should pay the tax bill? TRUE FALSE A B

45 The previous owner of the laundromat failed to pay his municipal property taxes for 3 years / $3800. The new owner should pay the tax bill? TRUE FALSE A B

46 Priority of Liens The usual rule as to priority of liens is that they rank in the order of their filing or recording in the office of the proper officials.  A mortgage recorded yesterday has precedence over one recorded today, and both are prior in lien to a mechanic's lien that may be filed tomorrow.  As to judgments, there is an exception to this rule; a judgment is not good against the rights of those claiming under a deed or mortgage actually delivered prior to the date of docket of the judgment, even though the deed or mortgage has not been recorded.

47 Perfected and Unperfected Liens Liens may be "perfected" or "unperfected.“  Perfected liens are those liens for which a creditor has established a priority right in the encumbered property with respect to third party creditors.  Perfection is generally accomplished by taking steps required by law to give third party creditors notice of the lien.  The fact that an item of property is in the hands of the creditor usually constitutes perfection. Where the property remains in the hands of the debtor, some further step must be taken, such as recording a notice of the security interest with the appropriate office.

48 Selling Property If you are planning on selling property that has a lien on it, it is unlikely that the sale will close unless the debt is taken care of. A buyer will expect liens to be paid to allow for a transfer of clear title. LIEN

49 Liens are ranked in order of their: B C D A Importance Filing date Amount Urgency

50 Liens are ranked in order of their: B C D A Importance Filing date Amount Urgency

51 Purchasing Property  When purchasing real estate, it is important to make sure there is no lien on the property that will prevent the securing of a clear title to the property.  Generally, a bank or other mortgage lender will not provide mortgage financing until all liens on the property have been removed.  A title search will usually indicate whether or not a lien exists and whether the seller is the legally recognized property owner.  It should also indicate the exact legal description of the property, as well as providing details regarding a lien or other encumbrances against the title.

52 Transferring Property without Removing Liens  The law does not require that liens be removed before title to property can be sold or transferred.  But the lien will need to be cleared up if the buyer needs financing or wants clear title.  If property is transferred without the lien being paid off, it remains on the property.  In transfers between relatives, the new owner may be willing to take title to property that already has liens encumbering it.

53 Property Lien Disputes If there is a property lien dispute, an experienced real estate attorney should be contacted to help resolve it.

54 Mr. Trump purchased a property that had a cloud on the property. A mechanics lien had been placed at city hall. 1 day prior to close. His title insurance __________ cover this as it was less than 36 hours before close. A B WOULD WOULD NOT

55 Mr. Trump purchased a property that had a cloud on the property. A mechanics lien had been placed at city hall. 1 day prior to close. His title insurance __________ cover this as it was less than 36 hours before close. A B WOULD WOULD NOT

56 How are Real Estate Liens Released/Assigned?  Obviously, a full payoff of one's debt will lead to the removal of a lien upon providing evidence to the County Records Office, but suppose you are ready to sell your home or trade in your vehicle but you've been told you have to obtain a "Release of Lien" first.  Normally, you would go back to the bank or Savings and Loan and ask them to prepare a release for you. But, where do you go if the bank or Savings and Loan has failed?

57 How are Real Estate Liens Released/Assigned? The Federal Deposit Insurance Corporation (FDIC), which is best known for insuring bank depositors to at least $250,000 per insured bank account, may be able to help by providing you with a Release of Lien on your home, vehicle, boat or other personal property if:  The lien holder is a bank or Savings and Loan Institution that failed and has been placed in FDIC receivership. Also, in some cases, if the lien holder is a Subsidiary of a failed bank or Savings and Loan. If you're not sure, please call the appropriate DRR Customer Service Center at or toll-free at  The loan was paid off before the institution failed.  The loan was paid off to the FDIC after the institution failed.

58 How are Real Estate Liens Released/Assigned? A request for a Release of Lien must be made in writing and be detailed.  Mail, or fax your request to the appropriate DRR Customer Service Center with the recorded document to be released or to be assigned showing the closed institution as the lien holder.  Also, a proof of payoff must be provided to expedite the completion of your request and avoid researching the records of the closed institution which will delay the completion of your request.

59 How are Real Estate Liens Released/Assigned? When an Assignment of Lien is needed to complete a chain of title, you must obtain an Assignment of Lien from the FDIC. The following documents are needed to obtain an Assignment of Lien:  A copy of the Mortgage or Deed of Trust Document that you are requesting to be assigned. The copy must be readable and clearly show the recording information. This document can be obtained from the Public Records in the County where the property is located or from your title company or title attorney.  Copies of any subsequent assignments that show the chain of title leading to an FDIC receivership.  Proof that the party to whom the assignment is being made is the current holder of the mortgage. Proof can be in the form of a Note Endorsement, Loan History, Sales Contract or Indemnification Agreement.

60 Who should be contacted to settle a property lien dispute? B C D A The FDIC A real estate attorney The Police The County Clerk

61 Who should be contacted to settle a property lien dispute? B C D A The FDIC A real estate attorney The Police The County Clerk

62 Where to Send Your Request A request for a Release of Lien must be made in writing. You can mail your request to: FDIC, 1910 Pacific Ave, Dallas TX Attention: DRR Customer Service Center/Inwood OR It can be faxed to

63 Section 2 REAL ESTATE TAX LIENS

64 An ad valorem tax (Latin for “according to value”) is a tax based on the value of real estate or personal property. An ad valorem tax is typically imposed at the time of a transaction, as in a sales tax or value-added tax (VAT), but it may be imposed on an annual basis (real or personal property tax) or in connection with another significant event (inheritance tax, surrendering citizenship, or tariffs). These taxes are specific, involuntary, statutory liens. General Ad Valorem Tax

65 General Ad Valorem Tax Sales Tax A sales tax is a consumption tax charged at the point of purchase for certain goods and services. The tax is usually set as a percentage by the government charging the tax.

66 General Ad Valorem Tax Sales Tax Value-Added Tax A value-added tax (VAT), or goods and services tax (GST), is a tax on exchanges, levied on the added value that results from each exchange. It differs from a sales tax because a sales tax is levied on the total value of the exchange.

67 General Ad Valorem Tax Sales Tax Value-Added TaxProperty Tax A property tax, or millage tax, is an ad valorem tax that an owner of real estate or other property pays on the value of the property being taxed. There are three species or types of property: Land, Improvements to Land (immovable man-made things), and Personalty (movable man made things).

68 Ad Valorem Importance  Ad valorem duties are important to those importing goods into the United States, because the amount of duty owed is often based on the value of the imported commodity. Ad valorem taxes (mainly real property tax and sales taxes) are a major source of revenues for state and municipal governments, especially in jurisdictions that do not employ a personal income tax.  "Ad valorem" is used frequently to refer to property values by county tax assessors. In many states, the central appraisal district sends certified values to the county tax assessor, who determines the final tax rate to be imposed on the property. Other states use a state tax commission, which notifies the appropriate taxing authorities of the assessed value of property within their billing jurisdiction.  Ad valorem tax relates to a tax with a rate given as a proportion of the price. For example, virtually all state and local taxes on restaurant meals and clothing are ad valorem.

69 Who benefits the most from ad valorem taxes? B C D A Taxpayers Local government Federal government Businesses

70 Who benefits the most from ad valorem taxes? B C D A Taxpayers Local government Federal government Businesses

71 What Property is Taxed? "Real property" for property tax purposes generally includes the land, building, structures, and all improvements or fixtures annexed to the building or structure. The definition of real property often excludes business personal property such as tools, implements, machinery, and equipment attached to or installed as real property for use in the business.

72 What Property is Taxed? Taxing authorities may also tax personal property. The items taxed vary by jurisdiction, but most jurisdictions do not impose property taxes on household goods, inventories, and intangible personal property such as bonds. Motor vehicles, however, are often subject to ad valorem taxation.

73 Determining the Amount of Ad Valorem Taxes  Generally, ad valorem taxes are assessed as of January 1 each year and are computed as a percentage of the assessed value of the property being taxed.  The assessed value of property generally is a fair percentage of fair market value.  "Fair market value" is usually defined as the price that a willing buyer would pay and a willing seller would accept for property, neither being under any compulsion to buy or to sell. It is also defined as the price at which property would change hands between a willing buyer and a willing seller when both have reasonable knowledge of all the facts necessary and neither is required to buy or sell.

74 Determining the Amount of Ad Valorem Taxes Appraisers hired by the taxing authority most often value the property. Most taxing authorities require periodic inspections of the subject property as part of the valuation process and establish appraisal criteria to determine fair market value. Such criteria include factors analyzing:  the cost of the property and subsequent depreciation;  comparable market data;  the use of the property; and  estimated annual net income generated by a business property.

75 Which of the following is considered “real property”? B C D A Land Buildings Structures All of the above

76 Which of the following is considered “real property”? B C D A Land Buildings Structures All of the above

77 Disputing Valuation Upon notification of assessment, the property owner may dispute the valuation. Generally, taxpayers may request a hearing at the local level and, if necessary, appeal the valuation to a higher agency and, ultimately, a tax court.

78 Levy of Tax and Classification  Once a value is determined, the tax is levied, and the property owner is notified.  The actual tax rate may vary depending on the property's classification.  Property is often classified according to its use.  Common classifications include commercial/industrial property, multiple dwelling property, residential homestead property, agricultural property, and business property.

79 Parties Involved County Tax Commissioner County Board of Tax Assessors County Board of Equalization Board of County Commissioners County Board of Education State Revenue Commissioner

80 Parties Involved County Tax Commissioner County Board of Tax Assessors County Board of Equalization Board of County Commissioners County Board of Education State Revenue Commissioner The County Tax Commissioner, an office established by the Constitution and elected in all counties except one, is the official responsible for receiving tax returns filed by taxpayers or designating the board of tax assessors to receive them; receiving and processing application for homestead exemption; serving as agent of the State Revenue Commissioner for the registration of motor vehicles; and performing all functions related to billing, collecting, accounting for, and disbursing ad valorem taxes collected in this county.

81 Parties Involved County Tax Commissioner County Board of Tax Assessors County Board of Equalization Board of County Commissioners County Board of Education State Revenue Commissioner The County Board of Tax Assessors, appointed for fixed terms by the county governing authority in all counties except one, is responsible for determining taxability and also for the appraisal, assessment, and equalization of all assessments within the county. The Board of Tax Assessors notifies taxpayers when changes are made to the value of property, receive and review all appeals filed, and insure that the appeal process proceeds properly. In addition, the Board approves all exemptions claimed by the taxpayer.

82 Parties Involved County Tax Commissioner County Board of Tax Assessors County Board of Equalization Board of County Commissioners County Board of Education State Revenue Commissioner The County Board of Equalization, appointed by the Grand Jury, is the body charged by law with hearing and adjudicating administrative appeals to property assessments made by the Board of Tax Assessors. (Note: An arbitration method of appeal is available to the taxpayer in lieu of an appeal to the Board of Equalization at the option of the taxpayer at the time the appeal is filed.)

83 Parties Involved County Tax Commissioner County Board of Tax Assessors County Board of Equalization Board of County Commissioners County Board of Education State Revenue Commissioner The Board of County Commissioners, or County Governing Authority (or the sole Commissioner in some counties), an elected body, establishes the annual budget for county government operations and then levies the mill rate necessary to fund the portion of the budget to be paid for by ad valorem tax.

84 Parties Involved County Tax Commissioner County Board of Tax Assessors County Board of Equalization Board of County Commissioners County Board of Education State Revenue Commissioner The County Board of Education, an elected body, establishes the annual budget for school purposes and then recommends the mill rate, which, with very few exceptions, must be levied for the School Board by the County Commissioners.

85 Parties Involved County Tax Commissioner County Board of Tax Assessors County Board of Equalization Board of County Commissioners County Board of Education State Revenue Commissioner The State Revenue Commissioner exercises general oversight of the entire ad valorem tax process. In addition, the State levies ad valorem tax each year in an amount which cannot exceed one- fourth of one mill (.00025).

86 Who receives tax returns filed by taxpayers? B C D A County Board of Tax Assessors County Board of Equalization Board of County Commissioners County Tax Commissioner

87 Who receives tax returns filed by taxpayers? B C D A County Board of Tax Assessors County Board of Equalization Board of County Commissioners County Tax Commissioner

88 Special Assessment (Improvement Taxes)  Special assessment is the term used in the United States to designate a unique charge government units can assess against real estate parcels for certain public projects. This charge is levied in a specific geographic area known as a Special Assessment District (SAD). A special assessment may be levied only against parcels of real estate which have been identified as having received a direct and unique "benefit" from the public project  This type of tax is always a specific and statutory lien. It can either be voluntary – meaning the property owners in the area that is going to be affected can petition for the improvement – or involuntary, which means that a government authority can initiate the process.  Special assessment taxes are imposed on real estate that requires property owners to pay for improvements such as streets, alleys, street lighting, curbs, and similar items that benefit their real estate. Such taxes are enforced in the same manner as general real estate taxes, with the same lien priority after the general real estate tax.

89 Special Assessment District A Special Assessment District (SAD) is a unique geographic area in which the market value of real estate is enhanced due to the influence of a public improvement and in which a tax is apportioned to recover the costs of the improvement.  Individual special assessment levies may be made only in a Special Assessment District. The SAD is one of two kinds of geographic areas commonly associated with a special assessment levy.  The other kind of geographic area is the "service district."  Circumstances vary according to state law, but the essential distinguishing feature between these two types of districts is this: a service district is composed of all individual parcels of land that are somehow connected to the public improvement for which the special assessment is to be levied. The special assessment district consists of only those properties which are designated by the applicable law as having received a specific and unique "benefit" from the public improvement.

90 Special Assessment District In the case of a dam, all properties located within a scientifically defined "watershed" and all properties lying within the floodplain of the dam are connected by how water drains from an entire watershed into a lake and how water within the lake may flood specific areas downstream. Since the area of a watershed and the area of a floodplain are often very, very large when compared to the area of a lake, it is possible for some portions of the watershed and floodplain to be physically located in a government unit other than the one in which the lake is located. It is also possible that the government unit authorizing a special assessment levy does not have jurisdiction to include all land within the watershed and floodplain.

91 Special Assessment District In the case of an economic development project (e.g. a parking structure for a business district) circumstances which would cause the service district and Special Assessment District to have differing geographic boundaries relate to the existing and permitted use of property rather than political subdivisions. That is, economic forces within the market would be the key to including or excluding a specific property. The service district for a parking facility is generally limited to the geographic area in which pedestrians would walk between businesses and the parking structure. An example might be that users of a parking structure will traverse an area defined as being within six blocks or less of a parking structure. In this example, the service district would consist of all properties lying within six blocks of the parking structure.

92 __________is the term used in the United States to designate a unique charge government units can assess against real estate parcels for certain public projects. B C D A Special assessment Unique assessment Helpful assessment Tax assessment

93 __________is the term used in the United States to designate a unique charge government units can assess against real estate parcels for certain public projects. B C D A Special assessment Unique assessment Helpful assessment Tax assessment

94 Special Assessment District Benefit There are variations between state governments as to what constitutes a “benefit” under special assessment laws. In general, the "benefit" must result directly, uniquely, and specifically from the public project. For example, when water and sewer lines are installed by government units, nearby land often increases in value. The presence both of safe drinking water and of sewer lines means that expensive wells and septic systems do not have to be installed by affected property owners. It also means the potential for contamination of ground water and surface areas from improperly treated sewage will be eliminated. Land that might have been “unbuildable” before may become buildable once government- provided water and sewer services become available. Providing water and sewer service are situations which may adapt formerly unusable land for residential or commercial use. A storm sewer or a dam or dike may mitigate flooding and make properties within the former flood zone more valuable.

95 Special Assessment vs. Ad Valorem Tax  The property tax most citizens are aware of is the ad valorem tax. Special assessment levies are not ad valorem property taxes, even though they may be collected on a property tax bill.  A special assessment is based strictly upon the concepts of "need" and "benefit."  Special assessments require a finding that the public improvement is "needed" for a reason consistent with the law which permits the special assessment and that each property specially assessed receives a unique, measurable and direct benefit from the public improvement that was needed.  The basic idea is, if government funds make a property more valuable, the government has the right to get money back from a property owner.

96 Tax Sale As one means of generating lost income from delinquent taxpayers, county governments offer tax sales at auction to the public. During Tax Lien Sales, what is purchased at these auctions is not land, rather a debt to be collected on. By purchasing the right to collect past due taxes, a buyer is in essence loaning money to the property owner to pay their taxes. During Tax Deed Sales however, the winning bidder will own the deed and the land, having purchased it from the county or authority performing the sale.

97  A Tax Lien or Tax Certificate Sale is a public sale, usually at auction, of the right to collect on a delinquent taxpayer's debt.  This sale is held by the County, generally once each year. What is purchased by the winning bidder is not the deed to a property. The purchaser's money pays the delinquent taxes to the County on behalf of the delinquent property owner.  In exchange, the purchaser is given first lien position on title, ahead of mortgages, deeds of trust, and judgments, subordinate only to State tax liens.  Under the terms of the sale which may differ greatly from county to county, if the debt is not repaid with interest (rate determined at the time of sale) within a specified time period, the purchaser of the tax lien may foreclose upon the property, and all junior (subordinate) liens are dissolved, forgiven, or otherwise not the responsibility of the purchaser. Tax Lien Sale

98  A Tax Deed Sale is a public sale, usually at auction, of the deed to the property of a delinquent taxpayer.  The Owner and all lien holders have been given ample time and have received proper legal notification that the property will be sold if due taxes are not satisfied.  Different than a Tax Lien Certificate Sale, the winning bidder purchases the deed to a piece of property, becoming the new owner and obtaining all rights to the property free and clear of liens, mortgages, deeds of trust, etc.  The more people who do bid generally means prices get higher and ultimately may not be such great deals. Sometimes, though, not that much interest exists in property, and people can acquire it for extremely low rates. Tax Deed Sale

99 Redemption  The “right of redemption” is the right of the foreclosed homeowner to buy the home back from the person who bought it at foreclosure.  Once the sale is complete, if the home was sold by judicial foreclosure, you may buy it back.  This is a statutory right, meaning there has to be a specific law providing for the right. Therefore if there is no statute there is no right of redemption.

100 Understanding Property Reassessment Buyers of commercial properties are supposed to have their properties reassessed and pay taxes on the full value of their property when “a change in ownership has occurred.”  Some states’ property tax laws require in general that real property be reassessed when there is a change in ownership. But loopholes in the law allow buyers to avoid reassessment even if 100% of a company changes hands.  The current system provides property owners with innumerable ways to structure change of ownership transactions to avoid paying higher taxes.  The laws governing “change of ownership” reassessments could be tightened to require reassessment if at least 50% of a corporation’s stock or ownership shares change hands.

101 ___________________ is a unique geographic area in which the market value of real estate is enhanced due to the influence of a public improvement and in which a tax is apportioned to recover the costs of the public improvement. B C D A Homeowners district Tax district Special assessment district Business district

102 ___________________ is a unique geographic area in which the market value of real estate is enhanced due to the influence of a public improvement and in which a tax is apportioned to recover the costs of the public improvement. B C D A Homeowners district Tax district Special assessment district Business district

103 Understanding Property Reassessment To qualify for reassessment, the following is required: A written “Application for Reassessment” (reverse) must be filed with the Assessor- Recorder within 60 days of the misfortune or calamity, or as otherwise provided by law, but in no case more than twelve months after the occurrence of said damage. If no application is made and the Assessor determines that within the preceding twelve months a property has suffered damage caused by misfortune or calamity that may qualify the property owner for relief under an ordinance adopted under this section, the assessor shall provide the last known owner of the property with an application for reassessment. The property owner shall file the completed application with the Assessor within 60 days of the date of mailing which appears on the notification by the Assessor, but in no case more than twelve months after the occurrence of said damage.

104 Understanding Property Reassessment To qualify for reassessment, the following is required: The damage to taxable property is $10,000 or more of full cash value, not including non-taxable items such as household and personal effects. The damage or destruction is not attributable to fault by the owner. Upon receiving a proper application, the Assessor will verify damage or loss by reappraising separately the land, improvements, and any personal property subject to property taxation. If the total value loss is $10,000 or more, the Assessor shall determine the percentage of loss to land, improvements and personalty. A ratio of damaged to undamaged full cash value will be established, and the current taxable value shall then be adjusted by the same ratio. The assessor shall notify the applicant in writing of the amount of the proposed reassessment and state that the applicant may appeal the proposed reassessment to the local Board of Equalization within six months of the date of mailing the notice.

105 Transfer Tax on Purchase Price of Property The transfer of title to real estate with consideration is taxed in many states. The methods and tax rates vary by state. Some states use "tax stamps" that are affixed to the deed and cancelled. Generally, the calculation begins with the purchase price of the property. Exemptions in some states include:  The balance owed on an assumed mortgage  Some states exempt property transfers below a certain stated dollar amount  Rates and methods of rate application also vary. On the next slide we will show you some examples of these rates and methods.

106 Transfer Tax on Purchase Price of Property An amount may be determined based upon a rate of $X for each $XXX or fractional part of the taxable value. For this example, we will assume that the tax rate is $0.90 for each $1,000 of taxable value. Suppose the taxable value is $225,000. We will need to divide the taxable value by $1,000 (Remember the equation $0.90 for each $1,000 - there are 225 1,000s in $225,000). Once we have the equation set up correctly, all that is left to do is to multiply the tax rate ($0.90) by the taxable units (225). This gives us a tax amount of $

107 The tax amount may also be calculated based upon a percentage of the taxable value. For this example, we will use the same taxable value of $225,000. The tax rate, for this example, will be You could also express this as.55%. To determine the tax amount, you will need to multiply the taxable value ($225,000) by the tax rate (.0055). This gives you a property transfer tax amount of $ Transfer Tax on Purchase Price of Property

108 Transfer Tax on Purchase Price of Property Let's say an investor is purchasing a property for $350,000, and is assuming the existing $218,000 mortgage. The tax rate is $0.45 per $500 or fraction thereof. So, we can start the equation with $0.45. Finding this number is similar to the first example, but with an additional step. Since we are assuming that a portion of the taxable value will be exempt, we must first calculate which portion is actually taxable. We mentioned in the last step that the investor is assuming the $218,000 mortgage. In this scenario, the amount that was assumed will be exempt and the remainder is the taxable value ($350,000 - $218,000 = $132,000). We then apply the tax rate like we did in the first example. Divide $132,000 by $500 to get the taxable units (264). To get the property transfer tax amount, we multiply the tax rate ($0.45) by the taxable units (264). This gives us a tax of $

109 What right allows a borrower in default to redeem a property within three months after a foreclosure sale if the proceeds are sufficient to pay off all indebtedness plus any other foreclosure costs? B C D A Right of redemption Right of reassessment Both a and b Neither a nor b

110 What right allows a borrower in default to redeem a property within three months after a foreclosure sale if the proceeds are sufficient to pay off all indebtedness plus any other foreclosure costs? B C D A Right of redemption Right of reassessment Both a and b Neither a nor b

111 Examining Tax Considerations  The tax benefits of home ownership may differ from those available to owners of investment property.  The legal reduction of tax liability, otherwise known as tax shelter, is available to all owners of a primary residence as well as to a taxpayer who owns investment property.  Different rules apply to each type of property, however, and must be followed carefully to earn the desired tax shelter.

112 Section 3 Taxes

113 Federal Income Tax  When the Tax Reform Act of 1986 reduced most tax rates and simplified the rate structure, certain real property tax benefits were changed or repealed.  The 60% deduction for long-term capital gain was repealed, and capital gain was treated as ordinary income and taxed at a rate no higher than 28%.  Mortgage interest also became subject to different rules that could limit its deductibility, especially if the home was refinanced, or a second mortgage, home equity loan, or line of credit was obtained.  The rules regarding depreciation also changed, so that all tangible property placed in service after December 31, 1986 was subject to the modified acceleration cost recovery system.

114 Federal Income Tax  The federal government taxes individuals based on their earnings by means of a progressive income tax.  The important consideration of a progressive tax is that the tax rate on which the taxpayer’s obligation increases rises with additional levels of income.  One of the major reasons for buying real estate is to get relief from taxes.  A federal income tax return must be filed by April 15 for the preceding calendar year if adjusted gross income is high enough or federal income tax has been withheld and a refund is due.

115 Both individuals and corporations are taxed. The amount of gross income required before a tax is imposed on an individual depends on:  Whether the income earner is married or single, including the divorced or legally separated;  Whether there are any dependent children;  If there is a spouse, whether the income earner is living with the spouse and whether income earner and spouse are filing jointly or separately. Federal Income Tax

116 The Tax Reform Act of _____ reduced most rates and simplified rate structure. B C D A

117 The Tax Reform Act of _____ reduced most rates and simplified rate structure. B C D A

118 Mortgage Interest Payment Deductions Mortgage interest payments on first and second homes are deductible from taxable income on loan amounts up to $1,000,000. Interest on loans secured by a personal residence, but not used to purchase the residence, is deductible on loan amounts up to $100,000. Local property taxes are also deductible. For most homebuyers, such deductions make the difference between an affordable home payment and one that is not.

119 Tax Credits A tax credit is a direct deduction, not from income but from tax owed. Credits for home solar energy system installations, as well as energy and water conservation measures, have been available in the past. Whether they will be available again depends on whether conservation and development of alternative sources of energy are again viewed as desirable goals to be pursued, even at the expense of a loss in tax revenue.

120 For the Investor An active investor is an investor who materially participates in managing the property on a regular and substantial basis. A passive investor is an investor who does not materially participate in managing the activity. Investment transactions are even more complex than normal transactions. Unless a real estate licensee is qualified as an income tax or investment counselor, offering advice on tax and economic factors should be left to the client’s tax preparer or advisor. An investor is someone who buys property for its appreciation or income potential and who does not plan to occupy it personally. An investor cannot take advantage of the homeowner’s exemption from federal income taxation, but receives other benefits of property ownership. Mortgage interest and property taxes are deductible from property income. Property income also can be reduced by such operating expenses as maintenance, utilities, and property management.

121 Depreciation Depreciation has two important components.  The depreciable basis of the property is the amount that may be depreciated. For real estate property, this is generally the price of the property plus acquisition costs, minus the value of the land.  The second component, useful life of an asset, is the number of years the asset will be useful to the investor, as determined by IRS tax laws.

122 Basis of Depreciation  Depreciation for tax purposes is not based on actual deterioration, but on the calculated useful life of the property. The theory is that improvements, not land, deteriorate and lose their value.  A building is thought to have a certain number of years where it can generate an income and after that is no longer a practical investment.  The investor is compensated for the loss by being allowed to deduct a certain dollar amount each year based on the useful life of the property until, on paper at least, the property no longer has any value as an investment.

123 A/an _________ investor materially participates in managing a property, while a/an _______ investor does not materially participate in managing activity. B C D A Active, passive Passive, active Hands-on, absentee Old, new

124 A/an _________ investor materially participates in managing a property, while a/an _______ investor does not materially participate in managing activity. B C D A Active, passive Passive, active Hands-on, absentee Old, new

125 Installment Sales  The seller pays tax on the gain from the sale of real estate in the year the gain is collected. In most cases, the entire gain is received in the same year as the sale occurs.  In an installment sale, a taxpayer sells property and receives payments over a term that extends beyond the present tax year.  The seller finances the portion of the purchase price that is received in future installments. The taxpayer can elect to report any profit on the transaction at the time of sale or as installment payments are received.  The taxpayer’s basis in the property plus costs of sale are totaled and deducted from the purchase price, or deducted proportionately from each tax year’s installment payments, with the remainder reported as taxable income.

126 Installment Sales Interest income is always taxable.  The IRS will impute an interest rate on the purchase balance if the sales contract does not provide for one or if the rate in the contract is below market rates.  Another requirement is that the sales price must be more than $3,000, and at least one payment must be due six months after the date of sale.  Spreading out the reporting of income usually favors the taxpayer/seller, who may avoid a step up to a higher tax bracket or who may not be able to pay the required tax in the year of sale. Investment property probably will have been depreciated by the taxpayer, and the taxpayer’s cost basis in the property reduced accordingly. To the extent that the installment contract price exceeds the property’s reduced basis, it must be reported as gain in the year of sale.

127 Installment Sales  Taxpayers selling real property and receiving one or more payments in a later year or years must report the sale as an installment sale unless the taxpayer specifically elects otherwise.  By selling on multi-year terms, a taxpayer avoids bunching gain/income in the year of sale. Rather, recognition of gain is deferred by spreading it over a number of tax years.  The installment sale method may be used for any kind of real estate, including vacant land.  The taxable part of installment payments is calculated by applying to each payment the profit percentage realized on the full transaction. This percentage is found by dividing the realized profit on the sale by the full contract price. IRS instructions should be followed for determining this percentage, based on the contract price, selling price, gross profit, and payments received.

128 ______, not _______, deteriorate and lose value. B C D A Land, improvements Owners, sellers Improvements, land None of the above

129 ______, not _______, deteriorate and lose value. B C D A Land, improvements Owners, sellers Improvements, land None of the above

130 Considering Home Valuation and Property Taxes Assessed value is price placed on land and buildings by a government tax assessor for use in levying property taxes. The assessed value of the property may be different than the appraised value. Appraised value or market value is rarely the same as assessed value.

131 Considering Home Valuation and Property Taxes Most appraisers use one of three approaches to establish the value of a property. Sales Comparison Approach Cost Approach The Sales Comparison Approach is normally considered to be the best indication of value for residential property. In this approach, the appraiser finds three to four comparable properties in the neighborhood which have recently sold. Ideally, these properties are within a one-half mile radius of the subject property and have sold within the last six months. The principle states that the maximum value of a house and property tends to be set by the sales price of an equivalent, equally desirable, similar substitute house and property, for a certain moment in time. The appraiser compares the sold properties to the subject property. Income Capitalization Approach

132 Considering Home Valuation and Property Taxes Most appraisers use one of three approaches to establish the value of a property. Sales Comparison Approach Cost Approach This approach considers the value of the land, assumed vacant, added to the cost to reconstruct the appraised building as new on the date of value, less the accrued depreciation the building suffers in comparison with a new building. Income Capitalization Approach

133 Considering Home Valuation and Property Taxes Most appraisers use one of three approaches to establish the value of a property. Sales Comparison Approach Cost Approach In this approach, the potential net income of the property is capitalized to arrive at a property value. This approach is suited to income-producing properties and is usually used in conjunction with other valuation methods. The process of converting a future income stream to a present value is known as capitalization. Income Capitalization Approach

134 Which of the following is the best method of establishing the value of a residential property? B C D A Sales Comparison Approach Cost Approach Income Capitalization Approach Land Use Approach

135 Which of the following is the best method of establishing the value of a residential property? B C D A Sales Comparison Approach Cost Approach Income Capitalization Approach Land Use Approach

136 Capital Gain on Home Sale Before the 1997 Tax Act, capital gains were taxed at a 28% maximum tax rate if the capital assets were held more than one year. The new tax Act brought a new set of rules. The 1997 Tax Act cuts the top tax rate on capital gains of individuals and introduces new holding period rules. Since July 28, 1997, there have been two different types of capital gains for non-corporate taxpayers:  Short-term gains, which are taxed at ordinary income rates;  Long-term capital gains. For tax years beginning after the year 2000, the maximum capital gains rate for long- term gains is 15%.

137 Types of Gain GAIN S

138 Types of Gain When a home is sold, a gain or loss is generally realized; in other words, there usually is a potentially taxable event. Realized Gain (Loss) GAIN S

139 Types of Gain When a home is sold, a gain or loss is generally realized; in other words, there usually is a potentially taxable event. Realized Gain (Loss) The part of the realized gain for which income tax must be paid is called recognized gain. Losses on a personal residence cannot be recognized; that is, they may not be written off. Recognized Gain GAIN S

140 Types of Gain The part of the realized gain that may be postponed from recognition is deferred gain; the taxpayer may postpone paying it. Deferred Gain When a home is sold, a gain or loss is generally realized; in other words, there usually is a potentially taxable event. Realized Gain (Loss) The part of the realized gain for which income tax must be paid is called recognized gain. Losses on a personal residence cannot be recognized; that is, they may not be written off. Recognized Gain GAIN S

141 Types of Gain The part of the realized gain that may be postponed from recognition is deferred gain; the taxpayer may postpone paying it. Deferred Gain When a home is sold, a gain or loss is generally realized; in other words, there usually is a potentially taxable event. Realized Gain (Loss) The part of the realized gain for which income tax must be paid is called recognized gain. Losses on a personal residence cannot be recognized; that is, they may not be written off. Recognized Gain The part of the realized gain for which there is no tax obligation is the excluded gain. Excluded gain can be used with a personal residence up to $500,000 for married persons filing jointly and $250,000 for single taxpayers. GAIN S Excluded Gain

142 The maximum tax rate for taxing capital gains before 1997 was: B C D A 38% 28% 18% 8%

143 The maximum tax rate for taxing capital gains before 1997 was: B C D A 38% 28% 18% 8%

144 Calculation of Gain or Loss When calculating capital gains, one must first understand the basis. “Basis is the amount of an investment in property for tax purposes,” according to IRS Publication 551. “Use the basis of property… to figure gain or loss on the sale or other disposition of property.” The amount of gain from the sale of a principal residence is the difference between the net sales price and the adjusted cost basis. The net sales price is the selling price less selling expenses. To calculate the gain on the sale of a primary residence, the cost basis usually is determined to be the original purchase price. So to compute the gain or loss, subtract the adjusted cost basis from the net sales price.

145 Calculation of Gain or Loss  The taxable gain generally is the difference between the purchase price plus capital improvements and the price when sold.  Closing costs on the sale also may be added to the cost basis.  When capital improvements plus costs of the sale are added to the original cost basis, the “adjusted cost basis” is the result. The adjusted cost basis is the owner’s original cost plus buying expenses, plus capital improvements, less certain deductions. Deductions include the nontaxable gain deferred from the sale of a prior residence and any depreciation or casualty losses taken.

146 Calculation of Gain or Loss Increases in Basis Increases in basis result from improvements to property that has a useful life of more than one year. Generally the costs of improvements which add to the basis of an asset include supplies and materials purchased for major repairs or additions, legal fees, recording fees, and similar charges

147 Calculation of Gain or Loss Increases in Basis Decreases in Basis Increases in basis result from improvements to property that has a useful life of more than one year. Generally the costs of improvements which add to the basis of an asset include supplies and materials purchased for major repairs or additions, legal fees, recording fees, and similar charges Basis is reduced by any event that represents a return of capital. This includes depreciation, expensing deduction (under the Internal Revenue Code Section 179), casualty losses, and depletion.

148 The _____ value is the value which will be used to compute depreciation and gain or loss on the sale of the asset. B C D A Capital Book Federal Increased

149 The _____ value is the value which will be used to compute depreciation and gain or loss on the sale of the asset. B C D A Capital Book Federal Increased

150 Capital Improvements vs. Maintenance Improvements are additions that add value to the property. Repairs are expenditures to maintain the current condition of the property. For example: a homeowner may paint the house, fix some windows, replace a broken gutter, or add aluminum siding over the existing wood siding. These items are ordinary repairs and maintenance except for the new siding, which is a capital improvement.

151 Capital Gain Exclusion  The tax laws allow a taxpayer who sells his or her principal residence to exclude the gain on the sale if certain conditions are met.  A principal residence is considered for tax purposes to be the primary place where the taxpayer resides.  The taxpayer may reside in more than one place, but can have only one principal residence. Therefore, second homes and summer homes do not qualify.

152 Capital Gain Exclusion Generally, some or all of the gain from the sale is excluded from income taxes if:  The exclusion is limited to $250,000 for taxpayers filing singly and $500,000 for married couples filing joint returns.  A married couple both occupied the home for two out of the last five years and one of them owned the home.  The two years do not have to be the most recent years, nor do they have to be consecutive.  The exclusion cannot be used more than once every two years.  The taxpayer owned and occupied the property as his or her principal residence for at least two of the five years before the sale. A prorated exemption can be claimed if sold before two years because of a job-related move or for health reasons.

153 Determining Gain The seller’s escrow statement lists a number of expenses. The expenses are write-offs or deductions, selling expenses, or nondeductible expenses. The mortgage interest and real estate taxes are deductions. Selling expenses, however, are not deductions; they are used to reduce the gain. When sellers pay points for a buyer’s loan, the points are not considered to be interest paid by the buyer. For the seller, they are a sales expense that will reduce any gain.

154 What additions add value to a property? B C D A Improvements Maintenance Repairs Only luxury items

155 What additions add value to a property? B C D A Improvements Maintenance Repairs Only luxury items

156 Determining Tax on a Property The fraction used to determine assessed value from market value is called the assessment ratio. Furthermore, some jurisdictions exempt certain amounts of a property’s assessed value to provide tax relief for certain types of property owners. Subtracting the amounts of exemptions from assessed value gives the property’s taxable value. In determining property taxes, we could consider a property with a market value of $210,000 in a jurisdiction that applies an assessment ratio of 40%.

157 Determining Tax on a Property From the government’s perspective, the steps in administering the property tax are:  property value assessment;  development of the budget and tax rate;  tax billing and collection. Taxation is an indirect yet significant controlling device affecting estimates of value. It is important for those engaged in the real estate business to know the variety of taxes and their effect on property transfers. Full consideration may involve retaining the services of accounting, legal, and tax specialists. There are many categories of property that may be exempt from taxation.

158 Section 4 FORECLOSURES

159 Foreclosure Foreclosure is the most commonly used legal process by which a lender or other real property lien holder may dispossess you of your home and sell the home in order to obtain repayment of a debt.

160 Foreclosure  The foreclosure process (judicial or non-judicial) in most states is a very technical process which the lender must follow. It is also time-consuming and may take a minimum of a couple months.  If the lender does not strictly adhere to the technical, statutory requirements, then the foreclosure may be set aside or the lender may have to redo the foreclosure, which could add more time to the process.  It is common for state statutes to provide a redemption period for homeowners, whereby an owner who is being foreclosed on may stop the foreclosure at any time up to the minute of the foreclosure sale by paying all amounts owed on the loan, including late fees, accrued interest, and the lender’s costs of foreclosure up to that point.

161 Types of Foreclosures Foreclosure by Judicial Sale It is available in every state and required in many; involves the sale of the mortgaged property under the supervision of a court, with the proceeds going first to satisfy the mortgage, then other lien holders and, finally, the mortgagor/borrower if any proceeds are left.

162 Types of Foreclosures Foreclosure by Judicial Sale It is available in every state and required in many; involves the sale of the mortgaged property under the supervision of a court, with the proceeds going first to satisfy the mortgage, then other lien holders and, finally, the mortgagor/borrower if any proceeds are left. Foreclosure by Power of Sale This type of foreclosure is also allowed by many states if a power of sale clause is included in the mortgage or if a deed of trust was used instead of a mortgage. In some states so-called mortgages are actually deeds of trust. It involves the sale of the property by the mortgage holder without court supervision.

163 Which foreclosure process is available in every state? B C D A Foreclosure by Power of Sale Foreclosure by Tax Foreclosure by Judicial Sale Both a and b

164 Which foreclosure process is available in every state? B C D A Foreclosure by Power of Sale Foreclosure by Tax Foreclosure by Judicial Sale Both a and b

165 Foreclosures Process Pre-Foreclosure In the pre-foreclosure stage, investors will likely be able to do the most good for the distressed homeowner and for themselves. Pre-foreclosure is where further damage to the homeowner's credit rating can be forestalled and the home may be transferred at a mutually-agreed-upon price before it is necessary to get the lender involved. This stage can last from one month to a year, depending on your local laws.

166 Foreclosures Process Pre-Foreclosure Foreclosure Stage The foreclosure auction is the most commonly known way in which a foreclosure can be purchased. If the homeowner does not reinstate their mortgage, the property goes to a public auction, where anyone can bid. Auctions can be tough because they sometimes occur on short notice and don't allow you much time to do research and analysis of the property. The foreclosure process itself will vary from one state to the next, depending on whether it is a title or lien state, which determines whether a judicial or non- judicial form of foreclosure is involved.

167 Foreclosures Process Pre-Foreclosure Post Foreclosure Foreclosure Stage At the post-foreclosure stage, the lender has already taken control of the property. The home is then in the possession of the lender's REO (Real Estate Owned) department, or in the hands of a new owner or investor who purchased the property at auction. Refer to the foreclosure notice to determine the name of the lender as well as the balance owed on the mortgage. Lenders are typically extremely willing sellers, because an REO on the books is an obvious sign of having made a poor lending decision. Both the overhead and losses involved with an REO – reflected in both the added reserves a lender must maintain as well as any potential property management fees incurred – means the bank is likely a willing negotiator.

168 In what part of the foreclosure process will investors be able to do the most good for the homeowner? B C D A Post-Foreclosure Foreclosure Mid-Foreclosure Pre-Foreclosure

169 In what part of the foreclosure process will investors be able to do the most good for the homeowner? B C D A Post-Foreclosure Foreclosure Mid-Foreclosure Pre-Foreclosure

170 Contesting a Foreclosure Contesting a Foreclosure  Because the right of redemption is an equitable right, foreclosure is an action in equity. In order to keep the right of redemption, the debtor can ask an equity court for an injunction.  If repossession is imminent, the debtor would need to seek a temporary restraining order. However, the debtor may have to post a bond in the amount of the debt. This would protect the creditor if the attempt to stop foreclosure were a naked attempt to cheat the lender and skip on the debt.  A debtor may also challenge the validity of the debt in a claim against the bank in order to stop the foreclosure and sue for damages. In a foreclosure proceeding, the lender bears the burden of proving that there was a valid debt.

171 Contesting a Foreclosure Contesting a Foreclosure There is case law to support the debtor's case: First National Bank of Montgomery v. Jerome Daly, 1969, in the Justice Court State of Minnesota; the Judge ruled in favor of the debtor on December 9, 1968: IT IS HEREBY ORDERED, ADJUDGED AND DECREED:  That the Plaintiff is not entitled to recover the possession of Lot 19, Fairview Beach, Scott County, Minnesota according to the Plat thereof on file in the Register of Deeds office.  That because of failure of a lawful consideration the Note and Mortgage dated May 8, 1964 is null and void.  That the Sheriff’s sale of the above described premises held on June 26, 1967 is null and void, of no effect. That because of failure of a lawful consideration the Note and Mortgage dated May 8, 1964 is null and void.

172 Short Sale Loan Assumption DIL of Foreclosure Delaying a Foreclosure Reinstatement Repayment Plan Mortgage Modification Refinance Home Sale The lender may agree to forbear, or hold off on, foreclosing for a specified period of time, during which time the lender may agree to allow the homeowner to pay less than the full amount of their mortgage; however, in the end the homeowner will eventually have to pay all amounts owed under the loan with applicable interest and late fees.

173 Forebearance Short Sale Loan Assumption DIL of Foreclosure Delaying a Foreclosure Repayment Plan Mortgage Modification Refinance Home Sale In many states a homeowner has a statutory right, regardless of the lender’s attitude, up to a certain point in the foreclosure process, to reinstate the loan or cure the default on the loan by paying all unpaid monthly payments with applicable interest and late fees, in which case your loan is reinstated, the foreclosure is stopped, and the homeowner has the right to continue making monthly payments on their loan as if a default had not occurred.

174 Forebearance Short Sale Loan Assumption DIL of Foreclosure Delaying a Foreclosure Reinstatement Mortgage Modification Refinance Home Sale The lender may agree to allow the homeowner to continue to make regular monthly payments on the loan and allow you to pay additional amounts each month to repay amounts owed for previously missed payments, interest and late fees.

175 The right of redemption is an _________ right. B C D A Equitable Unfair Excessive Undue

176 The right of redemption is an _________ right. B C D A Equitable Unfair Excessive Undue

177 Forebearance Short Sale Loan Assumption DIL of Foreclosure Delaying a Foreclosure Reinstatement Repayment Plan Refinance Home Sale The lender may agree to refinance or modify the homeowner’s loan so that they can pay smaller amounts over a longer period of time. This option works well if the loan amount is less than the value of the home or interest rates are currently lower than the existing interest rate

178 Forebearance Short Sale Loan Assumption DIL of Foreclosure Delaying a Foreclosure Reinstatement Repayment Plan Mortgage Modification Home Sale The homeowner may be able to find a different lender to provide them with a new loan, which will pay off the existing loan in default. This may be a particularly good option if the homeowner has significant equity in the home (which may allow you to avoid having to pay mortgage insurance as part of the loan payment, etc.) or if interest rates or loan products currently available are more favorable than their existing loan terms.

179 Forebearance Short Sale Loan Assumption DIL of Foreclosure Delaying a Foreclosure Reinstatement Repayment Plan Mortgage Modification Refinance The lender may agree to delay the foreclosure process to allow the homeowner enough time to sell their home and pay off the loan

180 When a lender agrees to hold off on foreclosing for a specified period of time, this is called: B C D A Reinstatement Forbearance Repayment plan Refinancing

181 When a lender agrees to hold off on foreclosing for a specified period of time, this is called: B C D A Reinstatement Forbearance Repayment plan Refinancing

182 Forebearance Loan Assumption DIL of Foreclosure Delaying a Foreclosure Reinstatement Repayment Plan Mortgage Modification Refinance Home Sale The lender may allow the homeowner to sell their property for less than the outstanding loan amount, in which case the lender would keep the sale proceeds and forgive the remaining debt; however, it is worth noting that in a short sale situation a homeowner may also experience federal and state income tax liability for that portion of the debt that was forgiven which will likely be treated as income to them for tax purposes.

183 Forebearance Short Sale DIL of Foreclosure Delaying a Foreclosure Reinstatement Repayment Plan Mortgage Modification Refinance Home Sale The lender may allow the homeowner to sell the home and allow a qualified buyer to take over or assume their loan and make the loan payments. However, if a homeowner decided to do this, they should make sure that the loan assumption documents specifically release them from any further liability for the loan.

184 Forebearance Short Sale Loan Assumption Delaying a Foreclosure Reinstatement Repayment Plan Mortgage Modification Refinance Home Sale The lender may allow the homeowner to give property to the lender by executing a deed in lieu of foreclosure in exchange for the lender forgiving the debt. Signing a deed in lieu of foreclosure means that the homeowner is actually conveying all of their ownership of the property to the lender or grantee under the deed. This option can still have a negative impact on their creditworthiness, but may not be as damaging as a foreclosure. If a homeowner uses this method, they should try to negotiate from the lender a full written release of any further obligation or liability relating to the debt.

185 If a lender agrees to refinance or modify a homeowner’s loan so they can make smaller payments over a longer period of time, it is called: B C D A Reinstatement Forbearance Mortgage modification Repayment plan

186 If a lender agrees to refinance or modify a homeowner’s loan so they can make smaller payments over a longer period of time, it is called: B C D A Reinstatement Forbearance Mortgage modification Repayment plan

187 The Upside and Downside to Foreclosures For a smart and hopefully generous investor, purchasing foreclosed properties can be a terrific real estate deal. The hope is that both parties to the transaction win by profiting from a timely transfer of title – which produces a good investment for the investor and divestment for the homeowner – and it might spare the homeowner's credit rating before things get any worse.

188 The Upside and Downside to Foreclosures For a smart and hopefully generous investor, purchasing foreclosed properties can be a terrific real estate deal. The hope is that both parties to the transaction win by profiting from a timely transfer of title – which produces a good investment for the investor and divestment for the homeowner – and it might spare the homeowner's credit rating before things get any worse. Profiting from foreclosures isn't the no- brainer many assume it to be. For each success story, there are likely five horror stories. Every real estate transaction involves risk. While investors with the very best of intentions can help to reduce their risk, they cannot completely eliminate it.

189 Who can benefit the most from a foreclosure? B C D A An investor The homeowner The bank The economy

190 Who can benefit the most from a foreclosure? B C D A An investor The homeowner The bank The economy

191 Borrower's Obligations  The mortgagor may be required to pay for Private Mortgage Insurance, or PMI, for as long as the principal of his/her primary mortgage is above 80% (or 78% for FHA) of the value of his property. In most situations, insurance requirements are sufficient to guarantee that the lender will get some pre-defined percentage of the loan value back, either from foreclosure auction proceeds or from PMI, or a combination of the two.  Nevertheless, in an illiquid real estate market or following a significant drop in real estate prices, it may happen that the property being foreclosed is sold for less than the remaining balance on the primary mortgage loan, and there may be no insurance to cover the loss. In this case, the court overseeing the foreclosure process may enter a deficiency judgment against the mortgagor. Deficiency judgments can be used to place a lien on the borrower's other property that obligates the mortgagor to repay the difference. It gives the lender a legal right to collect the remainder of debt from the mortgagor's other assets (if any exist).

192 Thank you for being a McKissock customer! Please fill out the evaluation form. We value your input! We hope you enjoyed the course, and if you have any questions, please don’t hesitate to call us at


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