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

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

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

© 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

© 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

© 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

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

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

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

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

© 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

© 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

© 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

© 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

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

© 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

© 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

© 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

© 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

© 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

© 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

© 2009 by South-Western, Cengage Learning Taxation To convert the mill rate to dollars, divide by 1000 To convert dollars to mills, multiply by = X

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

© 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

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

© 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

© 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

© 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

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

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

© 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

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

© 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

© 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

© 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

© 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

© 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

© 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

© 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

© 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

© 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%

© 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

© 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

© 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%

© 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

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

© 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

© 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

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

© 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

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

© 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

© 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

© 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

© 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

© 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

© 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

© 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

© 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

© 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