Chapter 15 Taxes and Assessments

Review Gov’t Limitation of Private Ownership of Real Estate Taxation (Ad valorem and Income) Escheat Eminent domain Police power

I. Ad Valorem Taxes Administering Property Taxes First step, identify all properties and estimate their values Second step, develop a budget and tax rate. –The budget is determined by the appropriate government officials based on the costs of providing government services to the community (police and fire protection, schools, libraries, street, etc.) –Dividing the budget amount by the tax digest (total value of properties in the jurisdiction) yields the tax rate necessary to generate the budget amount. Third step, bill the property owners and collect the taxes.

Key Terms/Calculations “Ad valorem” tax Millage rate Assessment ratio Exemptions The tax bill for a property with a market value of $120,000 in a jurisdiction that assesses a millage rate of 25 mills on 40% of a property’s market value and permits a exemption of $2,500 for this type of property is calculated as follows:

Tax Bill Calculation Market Value $120,000 multiplied by Assessment Ratio x.40 equals Assessed Value $48,000 minus Exemptions (if any) -$2,500 equals Taxable Value $45,500 divided by 1000  1000 times Millage Rate x 25 equals Property Tax $1,137.50

Expressing Property Tax Rates Mill RateDollars per HundredThousand School district 40 mills$4.00$40.00 City County Total80 mills$8.00 $80.00 Dollars per

Calculations using Mills 85 mills = mills = mills =.005 Move decimal: Tax appraised value Assessed value Millage rate (e.g., 80 mills; see previous slide) Result: Tax Bill

Other Taxing Matters Unpaid property taxes Assessment appeal Property tax exemption Property tax variations Special assessments

II. Income Tax on Sales A.Ordinary Sales B.Installment sales

A. Ordinary Sales: Basis is the price originally paid for the home plus any fees paid for closing. [Purc. price + Closing costs +Commission = Basis] Adjusted basis: basis plus improvements. [Basis + Improvements (if any) = Adjusted Basis] To calculate the gain you must take the sale price and subtract the selling expenses (“amount realized”) [Selling price - Selling expenses = Amt Realized]. Then subtract the basis (adj. basis) to determine the gain. [Amt realized – Basis (adj. basis) = Gain (loss) on sale]

Calculation of Gain Purchase price $90,000; closing costs are $500 Basis $ 90,500 Add landscaping and fencing for $3,500Basis $ 94,000 Add bedroom and bathroom for $15,000 Basis $109,000 Sell home for $125,000; sales commissions Amount realized $117,000 and closing costs are $8,000 Amount realized $117,000 Less basis -$109,000 Equals gain $ 8,000

Capital Gains Tax Rate 15 percent If property held longer than 1 year

Income Tax Exclusion Sale of principal residence Used for 2 of the last 5 years Married – exclude up to $500,000 gain Single – exclude up to $250,000 gain

Adjusted Sales Price Selling price of old home Less selling expenses Less fix-up costs Equals adjusted sales price $250, ,000 -7,000 $225,000

III. Miscellaneous A. Tax Deductions B. Interest Deductions C. Conveyance Taxes