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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
© 2009 by South-Western, Cengage Learning
© 2009 by South-Western, Cengage Learning
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
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TaxationTaxation
Real property taxRevenue for state and local government
Not federal government
Two typesAd valorem
Special assessment
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TaxationTaxation
Ad valorem:Ad valorem: according to valuation
Assessed value: Assessed value: value for determining taxes
Just value: Just value: fair market value
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TaxationTaxation
Establishing assessed value:
Review of property characteristics
Analysis of highest and best use
Application of approaches to value
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TaxationTaxation
Determining assessed value of income-producing property:
Occupancy
Vacancy information
Rents received
Leasing incentives
Expenses
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TaxationTaxation
Step 1: Step 1: Reduction determination
Step 2: Step 2: Appeal to the Value Adjustment Board
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TaxationTaxation
Step 3: Step 3: If appeal is:
Granted: assessment reduced
Denied : litigation
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TaxationTaxation
Immune properties: Immune properties: not subject to taxation
Government-owned buildings
Others: municipal airports and military bases
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TaxationTaxation
Exempt properties: Exempt properties: subject to taxation but not obligated
Churches and charitable organizations
Homesteads
Widow / widowers, blind, or other disabilities
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TaxationTaxation
Primary residence
$25,000 applied against assessed valuation
Owned by January 1
Proof of ownership by March 1
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TaxationTaxation
Formula:
Assessed Property Value
- Granted Homestead Exemption
= Property Value Subject to Taxation
X Mill Rate (Tax Rate)
Annual TaxAnnual Tax
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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
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TaxationTaxation
$500 property tax exemption
Plus $25,000 homestead
$500 property tax exemption
Ceases upon remarrying
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TaxationTaxation
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
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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
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TaxationTaxation
Property tax disclosure:
Tax at time of sale may not be the same in subsequent year
Reassessment may occur due to the sale
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TaxationTaxation
Green Belt Law: Green Belt Law: favorable tax treatment for agricultural properties
Assessed value based on current use
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TaxationTaxation
Districts:County
City
Special districts
Schools
Tax base: Tax base: total taxable value of all real property in a district
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TaxationTaxation
Mill rate: rate of taxation
Mill Mill is 1/1000 of one dollar
1/10 of one cent
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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
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TaxationTaxation
To set mill rate:
Annual budget - Revenue
Total taxable value
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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
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TaxationTaxation
Formula:
Assessed Value
- Exemption, if any
Taxes to be PaidTaxes to be Paid
Taxable Value
X Mill Rate
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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
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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
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TaxationTaxation
Special assessment taxes: Special assessment taxes: funds project that benefits only some citizens
Neighborhood street paving
Water and sewer installation
Neighborhood street lights
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TaxationTaxation
Tax based on benefit
Assessed by front footage
Priority over all other liens
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Federal Income TaxFederal Income Tax
Active income: Active income: compensation from employment
Salary / wages
Commissions
Gratuities
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Federal Income TaxFederal 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
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Federal Income TaxFederal Income Tax
Portfolio income: Portfolio income:
Stock dividends
Interest earned
Royalties on intellectual property
Annuities
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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
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Federal Income Tax and Real Federal Income Tax and Real PropertyProperty
Expenses an individual may deduct from taxable income:taxable income:
Property taxes
Mortgage interest
Origination fees
Home equity mortgages
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Federal Income Tax and Real Federal Income Tax and Real PropertyProperty
Expenses a business or investor may deduct from taxable income:taxable income:
Property taxes
Mortgage interest
Additional itemsOperation expenses
Depreciation
Operation losses
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Federal Income Tax and Real Federal Income Tax and Real PropertyProperty
Interest on MortgageInterest on Mortgage
First and second homes
Delinquent and late payments
Only interest due and payable in that year plus one month
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Federal Income Tax and Real Federal Income Tax and Real PropertyProperty
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
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Federal Income Tax and Real Federal Income Tax and Real PropertyProperty
Business deductions not available for individuals
Expenses of OperationExpenses of OperationRepairs
Maintenance
Insurance
Management fees
Utilities
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Federal Income Tax and Real Federal Income Tax and Real PropertyProperty
Depreciation:Depreciation:
Cost recovery
Caused by 3 events:Physical deterioration
Functional obsolescence
External obsolescence
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Federal Income Tax and Real Federal Income Tax and Real PropertyProperty
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
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Federal Income Tax and Real Federal Income Tax and Real PropertyProperty
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%
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Federal Income Tax and Real Federal Income Tax and Real PropertyProperty
Cost of acquisition
$ 6,000
$ 4,000
$ 1,500
$ 900
Commission
Legal Fees
Appraisal
Survey
Cost of Acquisition$ 12,400
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Federal Income Tax and Real Federal Income Tax and Real PropertyProperty
Total cost to acquire property
$ 100,000
$ 112,400
Purchase Price
Total cost to acquire property
Cost of Acquisition$ 12,400
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Federal Income Tax and Real Federal Income Tax and Real PropertyProperty
Amount attributed to the improvement
$ 89,920
$ 112,400
Total cost attributed to improvements
Total cost to acquire property
% improvement portion
X 80%
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Federal Income Tax and Real Federal Income Tax and Real PropertyProperty
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
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Federal Income Tax and Real Federal Income Tax and Real PropertyProperty
Nonresidential property recovery period:
After May 13, 1993 - 39 years
Accelerated methodGreater depreciation in early years
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Federal Income Tax and Real Federal Income Tax and Real PropertyProperty
Gains: profit on sale of real property
Capital gain
Amount Realized
- Adjusted Basis
Capital Gain
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Federal Income Tax and Real Federal Income Tax and Real PropertyProperty
Amount realized: actual selling price less cost of sale
Real estate commission
Closing costs / points
Attorney fees
Survey costs
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Federal Income Tax and Real Federal Income Tax and Real PropertyProperty
Adjusted basis:
Basis: purchase price plus cost of acquisition
Capital improvements
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Federal Income Tax and Real Federal Income Tax and Real PropertyProperty
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
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Federal Income Tax and Real Federal Income Tax and Real PropertyProperty
Homeowner may exclude up to:
$250,000
$500,000 married filing jointly
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Federal Income Tax and Real Federal Income Tax and Real PropertyProperty
Ownership Test
2 of the last 5 years
Use Test
Must live in the home as a principal residence
May be continuous or interrupted
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Federal Income Tax and Real Federal Income Tax and Real PropertyProperty
$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
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Federal Income Tax and Real Federal Income Tax and Real PropertyProperty
Once every 2 yearsReduced exclusion may be available if due to health or employment
Not a once in a lifetime exclusion
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Federal Income Tax and Real Federal Income Tax and Real PropertyProperty
Maximum tax rate:8%, 10%, 15%, 25% or 28%
Factors:Type of property
How long property was held
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Federal Income Tax and Real Federal Income Tax and Real PropertyProperty
Installment sale: Installment sale: payment received over time
Seller can postpone payment of tax to future years
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Federal Income Tax and Real Federal Income Tax and Real PropertyProperty
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
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Federal Income Tax and Real Federal Income Tax and Real PropertyProperty
Property values are the same
Neither pays
No gain or loss for either
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Federal Income Tax and Real Federal Income Tax and Real PropertyProperty
Property values are not the same
Boot: Boot: Party with lower value property pays money or gives something else
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Federal Income Tax and Real Federal Income Tax and Real PropertyProperty
Party trading up: No tax owed
Party trading down: pays tax due to:
Payment of boot
Exchange of mortgages with different values