© 2009 by south-western, cengage learning samirlander chapter 18

© 2009 by South-Western, Cengage Learning

SAMSAMIRLANDERIRLANDER

Chapter 18Chapter 18

Florida Real Estate:Florida Real Estate: Principles, Practices and Principles, Practices and

License LawLicense Law

Chapter 18Chapter 18

Taxes Affecting Real EstateTaxes Affecting Real Estate



Key TermsKey TermsActive 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


TaxationTaxation

Real property taxRevenue for state and local government

Not federal government

Two typesAd valorem

Special assessment


TaxationTaxation

Ad valorem:Ad valorem: according to valuation

Assessed value: Assessed value: value for determining taxes

Just value: Just value: fair market value


TaxationTaxation

Establishing assessed value:

Review of property characteristics

Analysis of highest and best use

Application of approaches to value


TaxationTaxation

Determining assessed value of income-producing property:

Occupancy

Vacancy information

Rents received

Leasing incentives

Expenses


TaxationTaxation

Step 1: Step 1: Reduction determination

Step 2: Step 2: Appeal to the Value Adjustment Board


TaxationTaxation

Step 3: Step 3: If appeal is:

Granted: assessment reduced

Denied : litigation


TaxationTaxation

Immune properties: Immune properties: not subject to taxation

Government-owned buildings

Others: municipal airports and military bases


TaxationTaxation

Exempt properties: Exempt properties: subject to taxation but not obligated

Churches and charitable organizations

Homesteads

Widow / widowers, blind, or other disabilities


TaxationTaxation

Primary residence

$25,000 applied against assessed valuation

Owned by January 1

Proof of ownership by March 1


TaxationTaxation

Formula:

Assessed Property Value

- Granted Homestead Exemption

= Property Value Subject to Taxation

X Mill Rate (Tax Rate)

Annual TaxAnnual Tax


TaxationTaxation

Example:

Taxable value: Taxable value: assessed value minus exemption

Assessed value

Homestead exemption

Taxable valueTaxable value

$100,000

- $ 25,000

$ 75,000$ 75,000


TaxationTaxation

$500 property tax exemption

Plus $25,000 homestead


Ceases upon remarrying


TaxationTaxation

10% or more disabled due to military service


Total and permanently disabled due to military service

Total exemption

May extend to spouse


TaxationTaxation

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


TaxationTaxation

Property tax disclosure:

Tax at time of sale may not be the same in subsequent year

Reassessment may occur due to the sale


TaxationTaxation

Green Belt Law: Green Belt Law: favorable tax treatment for agricultural properties

Assessed value based on current use


TaxationTaxation

Districts:County

City

Special districts

Schools

Tax base: Tax base: total taxable value of all real property in a district


TaxationTaxation

Mill rate: rate of taxation

Mill Mill is 1/1000 of one dollar

1/10 of one cent


TaxationTaxation

To convert the mill rate to dollars, divide by 1000

To convert dollars to mills, multiply by 1000

40

1000= 0.04= 0.04

0.008X 1000

88


TaxationTaxation

To set mill rate:

Annual budget - Revenue

Total taxable value


TaxationTaxation

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 = .008 per dollar of taxable value or 8 millsvalue or 8 mills


TaxationTaxation

Formula:

Assessed Value

- Exemption, if any

Taxes to be PaidTaxes to be Paid

Taxable Value

X Mill Rate


TaxationTaxation

Homestead exemption

Assessed value: $100,000

Mill rate: 8

Assessed Value

Exemption

Taxes owedTaxes owed

Taxable Value

Mill Rate

$100,000

- $ 25,000

$ 75,000

X .008

$ 600$ 600


TaxationTaxation

Truth-in-millage notice: Truth-in-millage notice: assessed value mailed prior to actual rendering of bill

Florida ad valorem levied on calendar year

ArrearsArrears: paid at end of year

Tax liens have priority over all other liens


TaxationTaxation

Special assessment taxes: Special assessment taxes: funds project that benefits only some citizens

Neighborhood street paving

Water and sewer installation

Neighborhood street lights


TaxationTaxation

Tax based on benefit

Assessed by front footage

Priority over all other liens


Federal Income TaxFederal Income Tax

Active income: Active income: compensation from employment

Salary / wages

Commissions

Gratuities



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



Portfolio income: Portfolio income:

Stock dividends

Interest earned

Royalties on intellectual property

Annuities


Federal Income Tax and Real Federal Income Tax and Real PropertyProperty

Two issues:

Deductions when calculating tax due

How tax is calculated when real estate is sold



Expenses an individual may deduct from taxable income:taxable income:

Property taxes

Mortgage interest

Origination fees

Home equity mortgages



Expenses a business or investor may deduct from taxable income:taxable income:

Property taxes

Mortgage interest

Additional itemsOperation expenses

Depreciation

Operation losses



Interest on MortgageInterest on Mortgage

First and second homes

Delinquent and late payments

Only interest due and payable in that year plus one month



Local Property TaxesLocal Property Taxes

Deductible in year paid

Uninsured Casualty lossesUninsured Casualty losses

Fire, theft, weather, earthquake, flood, and other natural causes

$100 IRS deductible plus 10% of adjusted gross income



Business deductions not available for individuals

Expenses of OperationExpenses of OperationRepairs

Maintenance

Insurance

Management fees

Utilities



Depreciation:Depreciation:

Cost recovery

Caused by 3 events:Physical deterioration

Functional obsolescence

External obsolescence



Deduction of a percentage of the cost of any improvement over a period of years

Land does not depreciate

Tax assessmentValue of land

Value of improvements



Purchase price: $100,000

Land value: $20,000

Land value is 20% of total property value

Value of improvement: 80%Value of improvement: 80%

$20,000$100,000

= 0.20 or 20%



Cost of acquisition

$ 6,000

$ 4,000

$ 1,500

$ 900

Commission

Legal Fees

Appraisal

Survey

Cost of Acquisition$ 12,400



Total cost to acquire property

$ 100,000

$ 112,400

Purchase Price


Cost of Acquisition$ 12,400



Amount attributed to the improvement

$ 89,920

$ 112,400

Total cost attributed to improvements


% improvement portion

X 80%



Residential rental property depreciated over 27.5 years

$ 89,920

= $ 3,270 Depreciation per year= $ 3,270 Depreciation per year

Total to be depreciated

# of years27.5



Nonresidential property recovery period:

After May 13, 1993 - 39 years

Accelerated methodGreater depreciation in early years



Gains: profit on sale of real property

Capital gain

Amount Realized

- Adjusted Basis

Capital Gain



Amount realized: actual selling price less cost of sale

Real estate commission

Closing costs / points

Attorney fees

Survey costs



Adjusted basis:

Basis: purchase price plus cost of acquisition

Capital improvements



Residential Property vs. Business/Investment Property: calculating adjusted basis

Residential PropertyResidential Property Business/investment PropertyBusiness/investment Property

Purchase Price

+ Cost of Acquisition

+ Capital Improvements

Adjusted Basis

Purchase Price

+ Cost of Acquisition

+ Capital Improvements

- Accumulated Depreciation

Adjusted Basis



Homeowner may exclude up to:

$250,000

$500,000 married filing jointly



Ownership Test

2 of the last 5 years

Use Test

Must live in the home as a principal residence

May be continuous or interrupted



$250,000

$500,000Married 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



Once every 2 yearsReduced exclusion may be available if due to health or employment

Not a once in a lifetime exclusion



Maximum tax rate:8%, 10%, 15%, 25% or 28%

Factors:Type of property

How long property was held



Installment sale: Installment sale: payment received over time

Seller can postpone payment of tax to future years



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



Property values are the same

Neither pays

No gain or loss for either



Property values are not the same

Boot: Boot: Party with lower value property pays money or gives something else



Party trading up: No tax owed

Party trading down: pays tax due to:

Payment of boot

Exchange of mortgages with different values

© 2009 by south-western, cengage learning samirlander chapter 18

Documents

cengage learning slide

cengage learning taxation

assessed value of income

property value subject

previous value

fair market value slide

value adjustment board

transfer slide