1. © 2009 by South-Western, Cengage Learning SAMIRLANDER Chapter 18

2. Florida Real Estate: Principles, Practices and License Law Chapter 18 Taxes Affecting Real Estate © 2009 by South-Western, Cengage Learning

3. Key Terms Active income Ad valorem Arrears Assessed value Boot Exempt income Exempt properties Green Belt Law Immune properties Installment sale Just value Like-for-like trade Passive income Portfolio income Special assessment taxes Tax base Tax rate Taxable income Taxable value Truth-in-millage (TRIM) notice

4. © 2009 by South-Western, Cengage Learning Taxation Real property tax Revenue for state and local government Not federal government Two types Ad valorem Special assessment

5. © 2009 by South-Western, Cengage Learning Taxation Ad valorem: Ad valorem: according to valuation Assessed value: Assessed value: value for determining taxes Just value: Just value: fair market value

6. © 2009 by South-Western, Cengage Learning Taxation Establishing assessed value: Review of property characteristics Analysis of highest and best use Application of approaches to value

7. © 2009 by South-Western, Cengage Learning Taxation Determining assessed value of income-producing property: Occupancy Vacancy information Rents received Leasing incentives Expenses

8. © 2009 by South-Western, Cengage Learning Taxation Step 1: Step 1: Reduction determination Step 2: Step 2: Appeal to the Value Adjustment Board

9. © 2009 by South-Western, Cengage Learning Taxation Step 3: Step 3: If appeal is: Granted: assessment reduced Denied : litigation

10. © 2009 by South-Western, Cengage Learning Taxation Immune properties: Immune properties: not subject to taxation Government-owned buildings Others: municipal airports and military bases

11. © 2009 by South-Western, Cengage Learning Taxation Exempt properties: Exempt properties: subject to taxation but not obligated Churches and charitable organizations Homesteads Widow / widowers, blind, or other disabilities

12. © 2009 by South-Western, Cengage Learning Taxation Primary residence $25,000 applied against assessed valuation Owned by January 1 Proof of ownership by March 1

13. © 2009 by South-Western, Cengage Learning Taxation Formula: Assessed Property Value - Granted Homestead Exemption = Property Value Subject to Taxation X Mill Rate (Tax Rate) Annual Tax

14. © 2009 by South-Western, Cengage Learning Taxation Example: Taxable value: Taxable value: assessed value minus exemption Assessed value Homestead exemption Taxable value $100,000 - $ 25,000 $ 75,000

15. © 2009 by South-Western, Cengage Learning Taxation $500 property tax exemption Plus $25,000 homestead $500 property tax exemption Ceases upon remarrying

16. © 2009 by South-Western, Cengage Learning Taxation 10% or more disabled due to military service $ 5000 property tax exemption Total and permanently disabled due to military service Total exemption May extend to spouse

17. © 2009 by South-Western, Cengage Learning Taxation Restricts the amount of increase of a homestead property Limited to the lesser of: 3% of previous value % change in Consumer Price Index Limits lifted upon transfer

18. © 2009 by South-Western, Cengage Learning Taxation Property tax disclosure: Tax at time of sale may not be the same in subsequent year Reassessment may occur due to the sale

19. © 2009 by South-Western, Cengage Learning Taxation Green Belt Law: Green Belt Law: favorable tax treatment for agricultural properties A ssessed value based on current use

20. © 2009 by South-Western, Cengage Learning Taxation Districts: County City Special districts Schools Tax base: Tax base: total taxable value of all real property in a district

21. © 2009 by South-Western, Cengage Learning Taxation Mill rate: rate of taxation Mill Mill is 1/1000 of one dollar 1/10 of one cent

22. © 2009 by South-Western, Cengage Learning Taxation To convert the mill rate to dollars, divide by 1000 To convert dollars to mills, multiply by 1000 40 1000 = 0.04 0.008 X 1000 8

23. © 2009 by South-Western, Cengage Learning Taxation To set mill rate : Annual budget - Revenue Total taxable value

24. © 2009 by South-Western, Cengage Learning Taxation Example: Annual budget: $16,500,000 Other revenue: $500,000 Taxable value: $2,000,000,000 $ 16,500,000 - $500,000 $2,000,000,000 =.008 per dollar of taxable value or 8 mills

25. © 2009 by South-Western, Cengage Learning Taxation Formula: Assessed Value - Exemption, if any Taxes to be Paid Taxable Value X Mill Rate

26. © 2009 by South-Western, Cengage Learning Taxation Homestead exemption Assessed value: $100,000 Mill rate: 8 Assessed Value Exemption Taxes owed Taxable Value Mill Rate $100,000 - $ 25,000 $ 75,000 X.008 $ 600

27. © 2009 by South-Western, Cengage Learning Taxation Truth-in-millage notice: Truth-in-millage notice: assessed value mailed prior to actual rendering of bill Florida ad valorem levied on calendar year Arrears Arrears: paid at end of year Tax liens have priority over all other liens

28. © 2009 by South-Western, Cengage Learning Taxation Special assessment taxes: Special assessment taxes: funds project that benefits only some citizens Neighborhood street paving Water and sewer installation Neighborhood street lights

29. © 2009 by South-Western, Cengage Learning Taxation Tax based on benefit Assessed by front footage Priority over all other liens

30. © 2009 by South-Western, Cengage Learning Federal Income Tax Active income: Active income: compensation from employment Salary / wages Commissions Gratuities

31. © 2009 by South-Western, Cengage Learning Federal Income Tax Passive income: Passive income: business activity or investment where individual is not actively in charge of day-to day activities Limited partnership Real property investments Sale of stocks Other investments

32. © 2009 by South-Western, Cengage Learning Federal Income Tax Portfolio income: Stock dividends Interest earned Royalties on intellectual property Annuities

33. © 2009 by South-Western, Cengage Learning Federal Income Tax and Real Property Two issues: Deductions when calculating tax due How tax is calculated when real estate is sold

34. © 2009 by South-Western, Cengage Learning Federal Income Tax and Real Property taxable income: Expenses an individual may deduct from taxable income: Property taxes Mortgage interest Origination fees Home equity mortgages

35. © 2009 by South-Western, Cengage Learning Federal Income Tax and Real Property taxable income: Expenses a business or investor may deduct from taxable income: Property taxes Mortgage interest Additional items Operation expenses Depreciation Operation losses

36. © 2009 by South-Western, Cengage Learning Federal Income Tax and Real Property Interest on Mortgage First and second homes Delinquent and late payments Only interest due and payable in that year plus one month

37. © 2009 by South-Western, Cengage Learning Federal Income Tax and Real Property Local Property Taxes Deductible in year paid Uninsured Casualty losses Fire, theft, weather, earthquake, flood, and other natural causes $100 IRS deductible plus 10% of adjusted gross income

38. © 2009 by South-Western, Cengage Learning Federal Income Tax and Real Property Business deductions not available for individuals Expenses of Operation Repairs Maintenance Insurance Management fees Utilities

39. © 2009 by South-Western, Cengage Learning Federal Income Tax and Real Property Depreciation: Cost recovery Caused by 3 events: Physical deterioration Functional obsolescence External obsolescence

40. © 2009 by South-Western, Cengage Learning Federal Income Tax and Real Property Deduction of a percentage of the cost of any improvement over a period of years Land does not depreciate Tax assessment Value of land Value of improvements

41. © 2009 by South-Western, Cengage Learning Federal Income Tax and Real Property Purchase price: $100,000 Land value: $20,000 Land value is 20% of total property value Value of improvement: 80% $20,000 $100,000 = 0.20 or 20%

42. © 2009 by South-Western, Cengage Learning Federal Income Tax and Real Property Cost of acquisition $ 6,000 $ 4,000 $ 1,500 $ 900 Commission Legal Fees Appraisal Survey Cost of Acquisition$ 12,400

43. © 2009 by South-Western, Cengage Learning Federal Income Tax and Real Property Total cost to acquire property $ 100,000 $ 112,400 Purchase Price Total cost to acquire property Cost of Acquisition$ 12,400

44. © 2009 by South-Western, Cengage Learning Federal Income Tax and Real Property Amount attributed to the improvement $ 89,920 $ 112,400 Total cost attributed to improvements Total cost to acquire property % improvement portion X 80%

45. © 2009 by South-Western, Cengage Learning Federal Income Tax and Real Property Residential rental property depreciated over 27.5 years $ 89,920 = $ 3,270 Depreciation per year Total to be depreciated # of years27.5

46. © 2009 by South-Western, Cengage Learning Federal Income Tax and Real Property Nonresidential property recovery period: After May 13, 1993 - 39 years Accelerated method Greater depreciation in early years

47. © 2009 by South-Western, Cengage Learning Federal Income Tax and Real Property Gains: profit on sale of real property Capital gain Amount Realized - Adjusted Basis Capital Gain

48. © 2009 by South-Western, Cengage Learning Federal Income Tax and Real Property Amount realized: actual selling price less cost of sale Real estate commission Closing costs / points Attorney fees Survey costs

49. © 2009 by South-Western, Cengage Learning Federal Income Tax and Real Property Adjusted basis: Basis: purchase price plus cost of acquisition Capital improvements

50. © 2009 by South-Western, Cengage Learning Federal Income Tax and Real Property Residential Property vs. Business/Investment Property: calculating adjusted basis Residential Property Business/investment Property Purchase Price + Cost of Acquisition + Capital Improvements Adj usted Basis Purchase Price + Cost of Acquisition + Capital Improvement s - Accumulated Depreciation Adjusted Basis

51. © 2009 by South-Western, Cengage Learning Federal Income Tax and Real Property Homeowner may exclude up to: $250,000 $500,000 married filing jointly

52. © 2009 by South-Western, Cengage Learning Federal Income Tax and Real Property Ownership Test 2 of the last 5 years Use Test Must live in the home as a principal residence May be continuous or interrupted

53. © 2009 by South-Western, Cengage Learning Federal Income Tax and Real Property $250,000 $500,000 Married and files jointly Either spouse meets ownership test Both spouses meet use test Neither can exclude gain from sale of another home in the same year

54. © 2009 by South-Western, Cengage Learning Federal Income Tax and Real Property Once every 2 years Reduced exclusion may be available if due to health or employment Not a once in a lifetime exclusion

55. © 2009 by South-Western, Cengage Learning Federal Income Tax and Real Property Maximum tax rate: 8%, 10%, 15%, 25% or 28% Factors: Type of property How long property was held

56. © 2009 by South-Western, Cengage Learning Federal Income Tax and Real Property Installment sale: Installment sale: payment received over time Seller can postpone payment of tax to future years

57. © 2009 by South-Western, Cengage Learning Federal Income Tax and Real Property Tax free exchange: payment deferred Real property held for investment, income, trade, or business Like-for-like trade: Like-for-like trade: both properties must be eligible

58. © 2009 by South-Western, Cengage Learning Federal Income Tax and Real Property Property values are the same Neither pays No gain or loss for either

59. © 2009 by South-Western, Cengage Learning Federal Income Tax and Real Property Property values are not the same Boot: Boot: Party with lower value property pays money or gives something else

60. © 2009 by South-Western, Cengage Learning Federal Income Tax and Real Property Party trading up: No tax owed Party trading down: pays tax due to: Payment of boot Exchange of mortgages with different values