Chapter 8Government Regulations and

Taxes

Government serves many purposes:

Providing improvements and services Providing for the national defense Providing for the needs of those unable to care for

themselves Protecting the economy

Government Regulations & Taxes

I. Local, State, and National Regulations

Many cities and counties have additional, more stringent construction standards than are required by state law called building codes

BUILDING CODES protect the public by ensuring that basic minimum construction standards for a structure including regulations of all methods, materials and components are met

A BUILDING PERMIT is an approved building application that includes plans, specifications, and a plot plan

Building codes are enforced under POLICE POWER

A. Building Codes

Cities and counties have a Master Plan and planning commission

The purpose of a master plan is to unify city planning

B. Master Plan

The NATIONAL ENVIROMENTA POLICY ACT OF 1969 (NEPA) requires both public and private sectors to conform to certain environmental standards

NEPA’s goal is to “encourage productive and enjoyable harmony between man and his environment”

Environmental Impact Statement Environmental Impact Report

C. Environmental Control

The federal COMPREHENSIVE ENVIRONMENTAL RESPONSE COMPENSATION AND LIABILITY ACT (CERCLA) allows the federal government to respond to releases or threatened release of hazardous substance that may endanger public health or the environment

CERCLA created a superfund to clean up abandoned hazardous waste sites

D. Hazardous Waste

The purpose of OSHA is to prevent work-related illnesses, injuries and deaths by making and enforcing rules for the workplace

Because of complaints of excessive regulations on small businesses, the SMALL BUSINESS REGULATORY ENFORCEMENT FAIRNESS ACT was passed in 1996

E. Occupational Safety & Health Administration

(OSHA)

The AMERICANS WITH DISABILITIES ACT requires owners and operators of places of public accommodation to make their facilities accessible to the handicapped to the extent that is readily achievable

Examples of requirements might be: Lowering of counters Widening of aisles Hand rails in hallways Widening washroom doors and cubicle doors Support rails in washrooms Sinks and faucets to accommodate wheelchairs Cup dispensers for water fountains

F. Americans with Disabilities Act

G. Landlord-Tenant Law

Rights of landlords as well as tenants are set forth in state statutes

Most states have adopted the UNIFORM RESIDENTIAL TENANT ACT that regulates landlords’ rights to enter the premises, security deposits, notice periods, duty to make repairs, responsibility for garbage, keeping the premises habitable, right to evict, etc

Every state requires real estate agents to be licensed and most states require contractors to be licensed

Licensing requires meeting personal standards, educational and/or experience requirements and/or passing a written test

H. Licensing Regulations

Every state requires disclosure to a buyer of defects known to the seller

Agency relationships must also be disclosed

Other federal disclosures include: Truth in Lending Act RESPA Lead-based Paint

I. Disclosure Regulations

ZONING LAWS regulate the use of property by prescribing what uses land can be put to, and by establishing uniformity throughout the community

Downzoning

Upzoning

J. Zoning

II. Public Housing

PUBLIC HOUSING is residential housing owned by a government agency and rented to the poor

While most low-income housing units are privately owned, there are approximately 1.1 million units in the United States

Public Housing

The primary reason for the failure of public housing has been personnel who lacked necessary skills and/or motivation

Management has often been chosen from social service backgrounds when personnel with business backgrounds was really needed

Public housing was planned primarily for families, so single persons are not provided for

Public housing has been unable to maintain the properties without operating at a deficit

A. Public Housing Equals Problem

Housing

Government construction costs generally exceed the cost of similar housing built by the private sector

Public housing takes property off the tax rolls since federal public housing does NOT pay city property taxes

It also creates a significant increase in the need for community services

B. Public Housing Costs Too Much

Very little planning has gone into some very expensive government projects

The future of public housing appears bleak for a number of reasons, including crime, graffiti, and poor property management

Without an owner who is profit motivated, public housing lacks the incentive for proper management

C. Failure of Public Housing

III. Subsidized Housing

HUD provides two types of subsidies:

Project-based

Tenant-based

Subsidized Housing

Project-based subsidies were given to owners or developers who agreed in advance to rental schedules

Under the terms of the initial low-interest loans, after 20 years, the borrowers could pay them off and be released from the rental limitation

The controlled rents charged were only about 1/3 of the market rent

A. Project-Based Subsidies

Section 8 housing provides tenant-based housing subsidies through certificates or vouchers

Landlords must sign a HOUSING ASSISTANCE PAYMENT CONTRACT

B. Tenant-Based Subsidies

IV. Anti-Trust Laws

The most important anti-trust act was the SHERMAN ANTITRUST ACT

It prohibits: Price Fixing Market Allocation Agreements Tie Ins Group Boycotting

Anti-Trust Laws

V. Rent Control

Rent control ordinances presume a market that fails to meet housing needs and fails to add sufficient additional housing units

Nationwide, less than 10% of apartments are subject to rent control

Voter initiatives have placed rent control on many ballots

15 states have passed legislation prohibiting rent control

A. History of Rent Control

B. Effects of Rent Control

If an owner is faced with decades of rent control, it becomes more economical to convert the apartments into condos and sell them

With no filtering down, minorities, recent immigrants and young married couples are actually kept out of areas as a result of rent control

Rent control acts as a disincentive to development by putting a cap on profits but NOT on losses

Rent control in Santa Monica was promoted to help the poor

80% of Santa Monica’s residents live in apartments

Santa Monica did not allow a new rent to be set when properties were vacated

In 1999, a state law overrode Santa Monica’s rent control as to vacant units

The repeal of rent control as to new units has fostered an apartment construction boom in Santa Monica

C. Rent Control in Santa Monica,

California

VI. Development

Subsidies and Fees

DEVELOPMENT SUBSIDIES are amounts paid to governmental agencies in order to get approval for a construction project

LINKAGE refers to the idea that developers of desirable central city office structures should provide funds to help improve less desirable areas of the city

A. Subsidies

B. Development Impact Fees

Development impact fees are not new and have become extremely popular in recent years

DEVELOPMENT IMPACT FEES are one-time charges to offset the public service costs of new developments

The purpose of the fees is to cover the expanding needs of the communities with new facilities

VII. Property Taxes

Real estate taxation is one of the oldest forms of taxation

Property tax CANNOT be avoided because land can’t be hidden

Property tax is the only major income source for local governments

A. Property Taxation

Religious institutions, schools, and government-owned property are exempt from property taxation

Charitable and fraternal organizations may also be exempt

B. Tax Exempt Property

County tax exemptions are sometimes offered to developers in order to encourage industry development

Some economists believe that tax incentives do NOT generally affect businesses’ real estate decisions and that cutting approval times would be a better incentive

C. Property Tax Exemptions

VIII. Agricultural

Property Tax Regulations

DEVELOPMENT RIGHTS are the legal rights to build upon a property

When a state buys development rights, the land must remain as farmland

A. Buying Development Rights

The government has kept marginal agricultural land in production through various subsidy programs

The bulk of farm subsidies go to large corporate farms…the top 8% of farms receive 40% of federal subsidy payments

B. Agricultural Production

Federal and state governments have subsidized many major water projects

This has resulted in water being available for agricultural users at less than its free market cost

C. Public Water Projects

IX. Income Taxes

Profit on the sale of a capital asset, such as real estate, is taxed at a rate lower than that used for other income

A. Capital Gains

Homeowners have an exemption from taxation on the gain from the sale of their principal residence of:

$250,000 – single person $500,000 – married couple

B. Homeowner Exemption on Capital

Gain

Homeowner’s who don’t take the standard deduction can annually deduct these three items from their income tax report for their personal residence:

Mortgage interest on loan Property taxes Prepayment penalties

Investors of income-producing properties can also deduct:

Operating expenses Depreciation of improvements

C. Deductions

DEPRECIATION for tax purposes is a yearly tax deduction for wear, tear, and obsolescence on investment property deducted from the income tax report

Residential property – 27 ½ years (straight line) Commercial property – 39 years (straight line)

D. Depreciation

Depreciation is a paper expense BUT it can be used to shelter income from taxation

If depreciation results in a loss, the loss can be used to shelter active income

E. Tax Shelters

Income tax rates are progressive: Tax rates increase as the amount of income increases

Tax rates are as follows: Lowest Bracket 10%

Lower Bracket 15%

Lower Middle Bracket 25%

Upper Middle Bracket 28%

Higher Bracket 33%

Highest Bracket 35%

F. Federal Tax Rates

The method of determining a profit or loss on the sale of real property is spelled out by the IRS

Accounting formulas:(1) Cost Basis (Purchase Price) $500,000 + Improvements $200,000

$700,000 - Depreciation $ 30,200 = Adjusted Cost Basis $669,800

(2) Sale Price $1,000,000 - Sales Expenses $ 32,500 = Adjusted Sale Price $967,500

(3) Adjusted Sale Price $967,500 - Adjusted Cost Basis $669,800 = Gain $297,700

G. Accounting for the Sale of Real Estate

A TAX CREDIT is a direct reduction from taxes owed; but a deduction in only a reduction from the gross income

H. Tax Credits

X. Installment Sales and

Exchanges

An INSTALLMENT SALE is the sale of real estate where the payments for the property extend over more than one calendar year

A. Installment Sales

An EXCHANGE is a transfer of real estate, where one party trades property for another’s property

The property must be of “like kind” in nature or character, not in use

If the exchange is a straight trade, the taxes are deferred

BOOT

B. Tax-Deferred Exchanges

The internal revenue code allows for a delayed exchange, commonly referred to as a STARKER EXCHANGE

A seller can sell a property and later identify a property he wishes to obtain in exchange

C. Delayed Exchanges

XI. Is the U.S. Heading Toward

Less Government?

While there have been voter mandates for less government, we have yet to see significant reductions in federal or state regulations, or in the size and expense of government

Less Government?

Local, State, and National Regulations

Building Codes Master Plan Environmental Control Hazardous Waste OSHA Americans w/Disabilities Act Landlord-Tenant Law Licensing Regulations Disclosure Regulations Zoning

Public Housing Problems Costs Too Much Failure of Public Housing

Subsidized Housing

Anti-Trust Laws

Rent Control Effects Santa Monica

Development Subsidies and Fees

Property Taxes Exemptions

Agricultural Property Tax Regulations

Chapter Summary

Income Taxes Capital Gains Homeowner Exemption Deductions Depreciation Tax shelters Federal tax rates Tax Credits

Installment Sales and Exchanges

Tax-Deferred Exchanges Delayed Exchanges

Less Government?

Chapter Summary