California Real Estate

Principles, 10th Edition

Chapter 14
Introduction to
Taxation

2015 OnCourse Learning

Chapter 14
Describe the real property assessment
procedure as required by Proposition 13.
List the rules regarding the date and manner
of payment of real property taxes; describe
the tax sale procedure in the event of
nonpayment of property taxes.
Explain homeowners, veteran's, and senior
citizen's property tax exemptions.
List the income tax advantages of real estate
ownership, including the changes due to
recent revisions in the tax laws.

Ad Valorem According to
Value

Real Property Taxes

House
Motor Home
Boat
Apartment building
Personal Property Taxes
Sales Tax
License Fee
Use Tax
Transfer Tax

Real Property Taxes

Assessed at full cash value
General (Ad
Valorem) Taxes
1. For general
support of
government
2. Levied against
all taxable real
property
3. Recur annually

Special Assessment
Taxes
1. For specific
purpose
2. Levied only
against properties
benefited
3. One-time tax

Proposition 13

Change of ownership form required to tax office

Cash value x 1% = Annual property tax + local taxes
Example: $200,000 lot x 1% = $2,000
Annual property tax x 2% per year = next years tax
Example:
Year 1 $200,000 x 1% = $2,000
2 $2,000 x 102% = $2,040
3 $2,040 x 102% = $2,080
4 $2,080 x 102% = $2,122.42
5 $2,122.42 x 102% = $2,164.87

PROPOSITION 13
Full Cash Value = $500,000
X 1% + local % = x 1.25%
Property Tax = $6,250
Ownership since March 1975
3/75 value + per yr. Max= present value
x 1% + local %
present tax
Upon ownership change
Current price paid (full cash value)
X 1% + local %
Present tax
New additions only taxed at current value on new
construction, not the entire property.

No Tax Change
Transfers between
spouses
Primary residence plus
first $1 million of real
property from parents to
their children

Propositions 60 & 90
Homeowners age 55 years and over
Allows the transfer of their low,
existing property tax base to another
home of equal or lower value

Proposition 60: in the same county.

Proposition 90: to another
California county
Only if that county's board of
supervisors agrees.

Real Property Tax

Fiscal Year
Year
Jan

Jul

Sep

Nov

Dec

Feb

Apr

Jun

1
1
1
1
10
1
10
30
Jan 1 Becomes a lien on the property
- File tax exemptions prior
July 1
- Fiscal tax year begins
Sept 1 - Tax rate determined
Nov 1
- 1st installment due (Jul 1 Dec 31)
Dec 10 - 1st installment delinquent
Feb 1
- 2nd installment due (Jan 1 Jun 30)
Apr 10 - 2nd installment delinquent
Jun 30 - Fiscal tax year ends

Tax Sale
A 10% penalty added to each late
installment
June 8 delinquent tax list published
June 30 property Sold to state
Five-year redemption period
Un-redeemed property deeded to state
Tax collector publishes notice of intent
to sell
Public auction tax sale
Controllers tax deed

Real Property Tax

Exemptions
1. California Homeowners Exemption $7,000
Reduces property tax ($7000 x 1% = $70)
Owner as of January 1-File by February 15
2. Veterans Exemption $4,000
3. Property tax postponement laws must be
checked with the county in which the
property is located
4. California Renters Relief Credit
against state income tax liability

HOMEOWNERS EXEMPTION
Owner occupied by January 1 and filed by February
15
$7,000 off full cash value
$500,000 full cash value
-7,000 homeowners exempt
$493,000 taxable value
Saves approx. $70
($7,000 x 1%)

Special Assessments
Liens
Tax liens and assessments have
priority over all other liens.
Street Improvement Act of 1911
Assessments noted on tax bill
For streets, sidewalks, lighting,
water, sewer or benefit the owners
directly such as for neighborhood
parks, schools, and fire stations.

Mello-Roos
Community Facilities
Failure
disclose allows buyer a 3-day right
Act
of to
1982

of rescission, and may result in disciplinary

action for the licensed agent
Municipal bonds
Skirts around property tax limitations of Prop
13
Boom for developers
Broker must disclose to prospective purchaser
May not be fully tax deductible

INCOME TAXATION
State and federal income tax
A progressive tax

Agents: Recommend tax counsel

Tax consequences may be a material
fact
Need good record keeping on property

PERSONAL RESIDENCE
Interest Deduction
Major Tax Advantages for
Homeowners:

1. Subject to a $1 million
dollar limitation
2. The interest on money
borrowed to purchase a first
and second home is fully
deductible against the
homeowners income
3. Property taxes paid are
deductible against personal
income

No taxable gain
recognized
on
Homeowners may claim an exception from taxation
on profit from the sale of their personal residence
Residence

up to a maximum amount of $250,000 for singles,

up to $500,000 for married couples.
Homeowner must have owned & resided in home 2
of last 5 yrs.
Can take the deduction every 2 years.
May not deduct depreciation, maintenance or
operation expenses.
Any gains above these amounts are taxed at the
current capital gain tax rate.

Installment sale
Sale with down payment & loan.
Income tax is due as loan is repaid
over term.

Income Property
Annual Deduction
Operating Expenses
T Taxes (Property)
I Insurance
M Maintenance
M Management
U Utilities
R Reserves for Replacement

Depreciation
27 years for residential income property
39 years for non-residential income
property

Investment property
Vacant land (unimproved property)

Trade or Business
Property

Owner derives major source of

livelihood from the property

1031 TaxDeferred
Exchanges
1. Pay no taxes at time of equal exchange
2.
3.
4.

The new property must be like for like kind

Any boot (cash) received is taxable The exchange
may be simultaneous or delayed.
If delayed there are rigid timetables and the exchange
is frequently called a Starker exchange.

+ $25,000 cash
Value $200,000
Basis
100,000
Mortgage 50,000

Value $300,000
Basis
150,000
Mortgage 75,000

Non-personal
residence
Exchange IRC 1031

Decreases basis on new property by the gain

deferred on old property
Tax liability is not forgiven - Defers (postpones) tax due,
NOT tax free
Close of escrow date rules:
Close concurrent
Delayed accommodator
45 days to name the new property
180 days (6 months) to close the escrow
Mortgage relief (Boot)