3. Real Property Taxes
A city or county receives most of its operating
revenue from the assessment and collections of real
property taxes
REAL PROPERTY TAXES are determined according
to the value of the real property, and are paid
annually or semi-annually
These taxes are called AD VALOREM TAXES which
are charged in proportion to the value of the property
4. A. Proposition 13
Prop 13 surprised the nation by rolling back the
California property tax to 1 percent of the owner’s
value, making it the lowest rate in the country
A “rough” estimate of property tax is approximately
1.25 percent of the sales price
Transfers of ownership can trigger reassessment
Propositions 58, 60, and 90 have created several
changes to Prop 13
5.
6.
7. B. Property Taxes Become A
Specific Lien
Property taxes are, in effect, liens against a specific
property
Property taxes for the following fiscal year become a
lien against the real property on January 1 of the
current year
8. C. Property Tax Time Table
Important tax dates can be remembered “No Darn
Fooling Around” as follows:
N November 1 (first installment due)
D December 10 (first installment is delinquent)
F February 1 (second installment due)
A April 10 (second installment is delinquent)
10. E. Homeowner’s Property Tax
Exemption
Homeowner’s property tax exemption is $7,000 of
assessed valuation
The HOMEOWNER’S PROPERTY TAX
EXEMPTION is a deduction on the property tax bill
of the first $7,000 of assessed value of an owner-
occupied property
11. F. Disabled & Senior Citizens
Property Tax Postponement
Seniors who are 62 years of age or older and have a
household income of $24,000 or less may qualify for
this tax postponement assistance program
This program offers them the option of having the
state pay all or part of the taxes on their homes
In return, a lien is place on the home for the amount
that the state has to pay
12. G. Veteran’s Exemption
Any California resident who served in the military
during a time of war is entitled to an annual $4,000
property tax exemption against the assessed value
of one property
This exemption also applies to the widow, widowed
mother, or pensioned father of a deceased veteran
For disabled California veterans who qualify, the
assessment limit can be raised up to $100,000
13. H. Tax Exempt Property
Some properties are partially or totally tax exempt
All real property owned by the federal, state,
county, or city government is automatically tax
exempt
45% of California is federally owned since it has
many national and state parks
Property of non-profit organizations used for
religious, charitable, medical, or educational
purposes is also tax exempt
15. Special Assessment Tax
A SPECIAL ASSESSMENT TAX is levied by a city
council or a county board of supervisors, with the
voters’ approval, for the cost of specific local
improvements such as streets, sewers, irrigation, or
drainage
Assessments are different from property taxes in
that they are levied once for a particular work or
improvement
16. A. Improvement Bond Act of
1915
The IMPROVEMENT BOND ACT OF 1915
finances street and highway improvements
through as assessment to property owners based
upon the frontage of property facing the
improved street
Through the issuance of municipal bonds, it
allows property owners up to 30 years to pay off
their portion of the improvement assessment
19. Documentary Transfer Tax
Documentary transfer taxes are paid only on the
new amount of money (cash down and new
financing), not on any assumed financing
The DOCUMENTARY TRANSFER TAX is a tax that
is applied to the consideration paid or money
borrowed when transferring property, except for any
remaining loans or liens on the property
The tax is computed at the rate of 55¢ for each
$500 or $1.10 per $1,000 of consideration or any
fraction thereof
21. A. Federal Gift Taxes
Both a husband and wife may now give away $5.34
million each over a lifetime without paying any gift
tax
A DONOR is the person giving the property as a gift
The DONEE is the person receiving the gift
22. B. Federal Estate Tax
A FEDERAL ESTATE TAX return must be filed for
the estate of every resident of the United States
whose gross estate exceeds $2,000,000 in value at
the date of death as of 2008, and $3,500,000 as of
2009
23. C. No State Gift & Inheritance
Taxes
In 1982, California repealed both the state Gift and
Inheritance taxes.
27. A. Deduction of Interest
Deduction of interest on your home loan
from your income taxes is one of the major
tax advantages of owning real estate
28. B. Deduction of Property
Taxes
Property taxes on your 1st
and 2nd
homes are
deductible from your income taxes
29. C. Deduction of Prepayment
Penalties
Prepayment penalties can also be deducted
from your income taxes
30. D. Sale of A Residence
The capital gains exclusion is by far your best tax
benefit of home ownership
Federal laws allow a taxpayer to exclude up to
$250,000 of gain for each individual ($500,000 for a
married couple)
This benefit can only be used once every 2 years for
a residence
32. Investors can deduct:
• Mortgage interest on loans
• Property taxes
• Prepayment penalties
• Operating expenses
• Depreciation of Improvement
33. A. Depreciation of Business
Property
DEPRECIATION FOR TAX PURPOSES is a yearly
tax deduction for wear and tear on improved
investment property that is deducted from the
taxpayer’s income on his or her income tax form
Only buildings and other improvements can be
depreciated, not the land
Residential properties can be depreciated for 27.5
years (straight line)
Commercial properties 39 years (straight line)
34. B. Advantages of
“Sale-Leaseback”
If the owner of a business sells his or her building for
cash, and then leases it back, the seller becomes a
lessee and the buyer the lessor
The advantage to the seller is all lease payments
can be deducted from income taxes and he receives
cash for the building
The advantage to the buyer is he can use the
purchase price as the new basis for depreciation and
establish a new depreciation schedule
36. A. Capital Assets
In real estate, a capital asset includes a personal
residence and any other real estate, because they are
long-term investments
CAPITAL GAINS are taxes at a lower rate than
ordinary income
CAPITAL LOSSES can be deducted from capital
gains
37. B. Californians Pay Both State
and Federal Income Taxes
All gains for Individual income tax are as high as
13.3% in California
Our state has the highest top marginal “Capital
Gains” tax rate -33.3% combined
38. C. Federal Income Tax Rates
Income tax rates are progressive
PROGRESSIVE TAXES are taxes where the rates
increase as the amount to be taxed increases, the
more you make, the more you pay
MARGINAL TAX RATE is the rate that the next
dollar earned puts you into
REGRESSIVE TAXES use the same rate no matter
how much you make, for example sales tax is a
regressive tax
39. D. Alternative Minimum Tax
The ALTERNATIVE MINIMUM TAX requires
taxpayers, who make above a certain amount of gross
income, to figure their taxes twice
They first do their taxes using the actual itemized
deductions method
Then figure them using the AMT rate and pay
whichever tax is higher
40. E. Accounting for the Sale of
Real Estate
The IRS has specific methods for
determining a profit or loss from the sale of
real estate:
42. A. Installment Sales of Real
Estate
An INSTALLMENT SALE is the sale of real estate in
which the payments for the property extend over
more than one calendar year
Installment sales are used because a gain is only
taxed in the year that it is received, spreading the
gain over several years
45. Dealer Property
DEALER PROPERTY is the inventory of properties
held primarily for sale to customers
Dealer properties do not qualify for tax-free
exchanges
47. A. Federal Tax Collection
Requirements
When dealing with foreign investors, the buyer is
required to set aside 10 percent of the purchase
price for the IRS
If this amount is NOT set aside, the broker may be
liable for the full amount of the tax not paid
48. B. State Tax Collection
Requirement and Exemptions
The state requires 3.3% of the sales price to be set
aside from Foreign Investors for the Franchise Tax
Board
The exemptions from the buyer withholding 3.3% of
the sales price for the Franchise Tax Board are :
Sales price is $100,000 or less
Property is seller’s principal residence, under certain conditions
Seller signs California Residency Declaration
Seller receives a waiver – Franchise Tax Board Form 593-C
50. A. Business License Taxes
A city may levy a tax against real estate brokerage
firms, which is based upon the gross receipts,
through a BUSINESS LICENSE TAX
51. Chapter Summary
• Property Taxes
• Proposition 13
• Specific lien
• Time Table
• Homeowner’s Tax Exemption
• Disabled/Senior Tax
Postponement
• Tax Exempt Properties
• Special Assessment Tax
• Improvement Bond Act of 1915
• Mello-Roos
• Documentary Transfer Tax
• Gift and Estate Taxes
• Federal Gift Taxes
• Federal Estate Tax
• No State Gift/Estate taxes
• Federal & State Income Taxes
• Taxes on Personal Residence
• Deduction of interest
• Deduction of property taxes
• Deduction of prepayment penalties
• Sale of a Residence
52. Chapter Summary
• Taxes for Income Producing
Properties
• Depreciation of Business Property
• Advantages of “Sale-Leaseback”
• Sale of Real Property
• Capital Assets
• Federal Income Tax Rates
• AMT
• Accounting for Sale of Investment
Property
• Installment Sales & Exchanges
• Installment sales of real estate
• Exchanges tax-deferred
• Dealer Property
• We Are Now Tax Collectors
• Foreign investors
• Other Taxes Paid by Brokers
• Business License
