© 2011 Cengage Learning

Real Estate Taxation Issues Chapter 14 © 2011 Cengage Learning

RATIONALE FOR CHAPTER Taxation is present in every part of our society. The scope of this chapter is to give you a working knowledge of how real estate is taxed and the often beneficial effect real estate ownership can have on the reduction or elimination of personal income tax through real estate ownership.

© 2011 Cengage Learning Focus of Presentation This chapter will teach you how real estate is assessed and reassessed, how owners are billed, and the available exemptions from taxation and reassessment.

© 2011 Cengage Learning Focus of Presentation You will learn the role depreciation plays in the potential reduction of personal income tax liability and how taxation on the sale of real estate can be deferred through the use of 1031 exchanges.

© 2011 Cengage Learning Focus of Presentation The tax implications of primary and secondary homes will be discussed as well as the tax benefits of homeownership.

© 2011 Cengage Learning CHAPTER FOURTEEN OUTLINE 14.1 REAL PROPERTY TAXES 14.2 INCOME TAXES 14.3 TAX SHELTER 14.4 FOREIGN INVESTMENT IN REAL PROPERTY TAX ACT

© 2011 Cengage Learning REAL PROPERTY TAXES Ad valorem implication on real estate taxation. Discuss the government’s options when a taxpayer fails to pay his or her personal income, or property taxes.

© 2011 Cengage Learning REAL PROPERTY TAXES Information that a tax bill contains. Supplemental tax bill how and when it is assessed Discuss who can create special assessments and how and when they can make the assessments.

© 2011 Cengage Learning REAL PROPERTY TAXES Proposition 13 Proposition 58 Propositions percent 110 percent Proposition 90 “different county” distinction “recipient county” issue

© 2011 Cengage Learning REAL PROPERTY TAXES Change-in-ownership statement. Types of properties that are partially or wholly exempt from taxation. Homeowner’s exemption and compare it to the veteran’s exemption. Senior citizen property tax postponement act.

© 2011 Cengage Learning INCOME TAXES Discuss the use of tax laws to affect public policy; how the tax laws are constantly changing, and the need for real estate agents to stay current on tax law as it affects real estate ownership. Remember not to exceed the scope of your knowledge and training by giving tax advice instead of recommending the client to a tax professional.

© 2011 Cengage Learning INCOME TAXES Capital gain tax and the difference between short-term and long-term capital gain taxation. Benefits that are associated with ownership of a primary personal residence and identify the various types of structures that qualify.

© 2011 Cengage Learning INCOME TAXES Tax benefits associated with a secondary residence. Universal Exclusion for Gain on Sale of Principal Residence - for single and married taxpayers. Deductible and non-deductible home buying expenses.

© 2011 Cengage Learning INCOME TAXES Original basis as it relates to building a home, buying an existing home, or inheriting a home. Tax benefits associated with owning business and investment property.

© 2011 Cengage Learning INCOME TAXES Depreciation allowance Three types of basis and how each one is calculated.

© 2011 Cengage Learning INCOME TAXES Adjusted basis Compute capital gain Calculate depreciation Federal tax table for depreciation of real property

© 2011 Cengage Learning INCOME TAXES Depreciation allowance issue Depreciation recapture and capital gains tax

© 2011 Cengage Learning INCOME TAXES Tax-deferred exchanges and how they benefit commercial property owners.

© 2011 Cengage Learning INCOME TAXES Discuss how to analyze a transaction to see if it qualifies as a tax-deferred exchange. Discuss the actual exchange mechanics, and how the IRS now requires the use of an intermediary to validate the exchange.

© 2011 Cengage Learning INCOME TAXES Equal-or-up rule Entity rule Investment property rule Like-kind rule

© 2011 Cengage Learning INCOME TAXES No-choice rule and the no-loss rule Delayed exchange How to calculate an exchange analysis Boot

© 2011 Cengage Learning INCOME TAXES Installment sales Benefits of a sale-leaseback transaction

© 2011 Cengage Learning TAX SHELTER Equitable owner Discuss the deductibility of home interest and real property taxes and the limitations placed on the types and amounts of loans.

© 2011 Cengage Learning TAX SHELTER Discuss the deductibility of points, and what points really are. (Loan acquisition fees are deductible while discount points paid to help a VA or FHA buyer obtain financing are not; they increase basis). Discuss how to determine gain and the different types of gain. Use the text example to calculate the gain on the sale of a residence.

© 2011 Cengage Learning TAX SHELTER How home improvements are treated for tax purposes. Difference between home improvements, which add to a property’s basis; and maintenance, which is not deductible for a personal residence.

© 2011 Cengage Learning TAX SHELTER Forced sales Other tax shelter issues

© 2011 Cengage Learning FOREIGN INVESTMENT IN REAL PROPERTY TAX ACT Discuss why FIRPTA was enacted by our legislators. Discuss the buyer’s responsibility to withhold tax when buying from a foreign person, how it is handled by the escrow agent, and what the percentage amounts.

© 2011 Cengage Learning FOREIGN INVESTMENT IN REAL PROPERTY TAX ACT Discuss the use of the buyer’s affidavit for exempt properties under $300,000. Discuss the exemptions from California withholding. Discuss the use of Form 597-A for installment sales involving a foreign person.