REAL PROPERTY TAXES With the passage of Proposition 13, the California Supreme Court has defined property tax as " an acquisition value system ". Basically Proposition 13 has provided a "new" system.
Taxes are billed on a fiscal year, which is July 1 of each year to June 30 of the following year. Taxes are paid as follows: N ovember 1 – Due D ecember 10 @ 5:00 pm – Delinquent F ebruary 1 - Due A pril 10 @ 5:00 pm - Delinquent
Remember, when it comes to property tax, there is N o D arn F ooling A round with property taxes. Mr. & Mrs. Redman receive their 2003-2004 tax bill, and the total real property tax is $2,400. They pay $1,200 on November 1, 2003 and another $1,200 on February 1, 2004.
CHANGE IN OWNERSHIP STATEMENT Any person acquiring an interest in property subject to local taxation must notify the county Recorder or Assessor by filing a Change in Ownership Statement within 45 days of the date of recording or, if the transfer is not recorded, within 45 days following a written request from the Assessor.
PROPOSITION 13 Usually the Fair Market Value (FMV) is defined as the purchase price. Under Proposition 13 the property tax is 1% of the value at the time of purchase Each county may add an additional property tax to the 1%. Usually a county will add 0.25% to 1% more.
Mr. Smith purchased home for $300,000. Assume the property tax is 1.25% for the area. Thus his tax would be$3,750 per year or $1,875 every 6 months. In this class we will use 1.25% Under Proposition 13 the property value may be increased each year at an index rate determined by the California Industrial Relation's Board or 2%, which ever is the lesser.
Mr. Smith purchased home for $300,000. The first year he will pay $ 3,750 (300,000 x 0.0125) this year. Assume that index is increased by 2%. His new tax value for next year would be: $300,000 × 1.02 = $306,000. The taxes would be $3,825 per year ($306,000 × 0.0125) the next fiscal year.
Mr. Wilson purchased some land to build his home at a cost of $50,000. After six months of sweat and physical labor, he finished his home. The only costs was that of materials for $100,000. Total cost of the home was $150,000. Because of his ability and labor the home had a FMV (fair market value) of $250,000. The local county assessor could legally assess the home for $250,000.
PROPOSITION 8 Decline - in - Value Reassessment, approved by the voter in 1978. Allow taxable values of any property to decline below the factored base year value established by Proposition 13 to be reassed at the lower value.
Mr. Wilson purchased a property in 1989 for $250,000. The base year will be 1989 and will be placed on the tax rolls at $250,000. In 1991 Mr. Wilson found out that he could only sell his property for $150,000. In other words, his property declined in value by $100,000. He now can petition the county to have his property enrolled at the value of $150,000.
PROPOSITION 58 1. A principal residence (a home) on which there is a homeowner's exemption can be transferred to parent or child with no change in the real property basis. 2. The first $1,000,000 of other real property between parent and child is exempt from reassessment.
The code defines a child as a natural child (any child born of the parents), any stepchild or spouse of that stepchild as long as the relationship of stepparent and stepchild exists, a son-in-law or daughter-in-law of the parent(s) as long as the relation exists or a child who was adopted by the age of 18.
Mr. Wells wants his mom to purchase his home. His real property tax basis is $100,000. If his tax rate is 1½% (0.015) for his area, then his annual property tax will be $1,500 ($100,000 × 0.015). The home now has a FMV of $300,000. If mom buys the home without notifying the county, then her annual tax bill will be increase to $4,500 ($300,000 × 0.015). But, if she files a SBE Form PT-58, then she will retain her son's tax-basis and her annual tax bill will be $1,500. This is a savings of $2,000 per year.
If the property is NOT the transferor's principal residence and is $1,000,000 or less, then the transfer is excluded from reassessment. If the assessed value is more than $1,000,000, then the transfer must specify the amount and allocation of the exclusion on the claim.
DOCTRINE OF STEP–TRANSACTION If one transaction depends upon another transaction, that is, if you would not do the first transaction unless the second transaction is done, this is referred to as the doctrine of step-transaction and step-transactions are not allowed in real property tax transactions.
There are three members of the Doner family. Mom Doner, son Bob Doner and daughter Sally Doner. Bob wants to sell his property to his sister Sally and they want to keep the same property tax basis. So Bob sells the property to mom and shortly thereafter, mom sells to daughter Salley. Because this is a transfer between parent and child they feel they have accomplished their goal.
The problem is that this transfer is a step–transaction, according to IRS. Bob would not have sold to mom unless Mom sold to Sally. Therefore, this transaction would be disallowed. BOB (Son) SALLY (Daughter) MOM
PROPOSITION 60 Proposition 60 provides that a qualified homeowner aged 55 or older may transfer the current base-year value of his present principal residence to a new replacement (that is, to sell their old home and buy a new home), with these conditions.
1. Both properties must be in the same county. 2. The claimant must be at least 55 years old as of the date of transfer (sale). If married one of the spouses must be 55 years or older 3. The original resident must be eligible for a homeowners' exemption at the time of sale (transfer).
5. If the new home is bought before or on the same day of the sale of the old home, the purchase price of the new must be equal to or less than sales price of the old home. 4. The new home must be purchased within a two year period before the sale of the old home or within a two year period after the sale of the old home.
If the new home is purchased within the first year after the sale of the old home, the purchase price may exceed the sales price of the original residence by 5%. Finally, if the new home is purchased within the second year period of the sale of the old home, then the purchase price may exceed the sales price of the old home by 10%.
Sale of Old Residence 2 nd 1 st 0 1 st 2 nd Yr. Yr. Yr. Yr. = to or = to or 5% 10% less less Sold Purchased Real Property Tax Base Time Line
Mr. Prior purchases a new home for $190,000 this year. He sells his old home after buying the new home for $200,000. Since he purchased the new home first and paid equal or less than the sales price of his old home and he did so within a two year period before the sale of his old home, he is allowed to carry his old real property assessment value to the new home.
If the old home had a real property assessed value of $75,000, the new home would have a real property tax basis of $75,000. If the property tax rate is 1.25% then the new property would have property taxes of $938 ($75,000 × 0.0125%) per year. If Mr. Prior doesn’t file for Prop 60, his property taxes would be $2,500 ($200,000 × 0.0125).
Mr. Harvey sold his old home for $200,000 today. He purchases a new home for $200,000. Since the purchase of the new home was equal to the sale price of his old home and he did so within a two year period before the sale of his old home, he is allowed to carry his old real property assessment value to the new home.
Mr. Evans purchased his old home for $75,000, and sold it for $200,000 on March 22, 2000. He purchased a new home for $210,000 on March 23, 2000. Since the purchase of the home falls within the first year after the sale of his old home he may purchase the new home for 5% more than the sales price of his old home ($200,000 × 5% = $210,000). Since he has met all the requirements, his assessed value will be carried over to the new home. His property tax basis would be $75,000.
Ms. Holmes purchased her old home for $75,000, and sold the old home for $200,000 on April 2, 2000. She purchased a new home for $220,000 on April 1, 2002. Since the sale of the home falls within the second year period after the sale of her old home, she may purchase the home for 10% more than the sales price of her old home ($200,000 x 10% = $220,000). Since she has met all the requirements, she may carry over her real property assessed value to the new home, or a property tax basis of $75,000.
PROPOSITION 90 Proposition 90 is an extension of Proposition 60. Proposition 90 allows the purchase of the new home in a different county in California. However, the county the homeowner is planning to move into may reject Proposition 90.
Alameda Modoc Contra Costa Orange Inyo Riverside Kern San Diego Los Angeles San Mateo Marin Santa Clara Ventura PROPOSITION 90 Counties that allow proposition 90.
On September 2 this year, Ms. Knight sold her principal residence in Anaheim, Orange County, California for $300,000. She purchased it for $150,000, and today he property tax basis is $150,000. The property taxes are $1,875. On April 15 next year, she purchased a new home in Corona, Riverside County, California for $200,000.
If she files a Form PT–60, Claim for Replacement Dwelling Base-Year Value Transfer , the county assessor's office will then transfer the $150,000 base-year value assuming that the transfer meets all of the other requirements.
On September 2 this year, Ms. Knight sold her principal residence in , Victorville, San Bernardino County, California (a non prop–90 county) for $300,000. The base-year value at the time of sale was $150,000. On April 15 next year, she purchased a new home in Fullerton, Orange County, California (a prop-90 county) for $200,000. If she files a Form PT–60, Claim for Replacement Dwelling Base-Year Value Transfer , the county assessor's office will then transfer the $150,000 base-year value assuming that the transfer meets all of the other requirements.
On September 2 this year, Ms. Knight sold her principal residence in Fullerton, Orange County, California for $300,000. The base–year value at the time of sale was $150,000. On April 15 next year, she purchased a new home in , Victorville, San Bernardino County, California (a non prop–90 county) for $200,000. Therefore she will be taxed at the full assessed value of $300,000.
BUYING PROPERTY Before you can sell the property, you need to buy a property.
You will either:
Buy a home
Buy investment type of property (rentals),
Create a subdivision (are not investments nor homes and are treated differently for tax purposes).
TYPES OF BASIS The starting point for all tax calculations on real estate property is the original basis. Original Basis – the purchase price plus buying costs
Depreciable Basis – the amount of the original basis that is allowed to be depreciated by tax law. Adjusted Basis – the original basis plus improvements less all depreciation taken. The basis will change over the time of ownership.
HOME OWNERSHIP Two simple true and false questions on home ownership.
Question #1: Mr. Bowman has two homes, one in the city and one on the beach. He spends 4 days a week in city home and 3 days a week at his beach home. He decides to sell his beach home. Since it is his home, he does not have to pay income taxes on the sale the home at the beach. T rue or F alse F
A taxpayer (husband and wife) can only have one home (primary principle residence) at any one time. The primary principle residence is where the taxpayer spends most of the time.
Question #2: Mr. Avila owned his home (principle primary residence) for 1½ years and sells it. Since it is his home, he will not have to pay taxes on it. T rue or F alse F
A Taxpayer must own his home for two years. 365 + 365 + 1 = 731 more than 2 years.
PRINCIPAL PERSONAL RESIDENCE A person (husband & wife) can only have one principal personal residence at any one time. The principal personal residence is where the owner spends most of his/her time.
SECOND HOME All other personal residences are considered to be second homes. Second homes get no preferential tax treatment.
ORIGINAL BASIS OB = PP + BE Where: OB = Original Basis PP = Purchase Price BE = Buying Expenses NOTE: A Primary Principal Residence (home) cannot be depreciated, like an investment property.
Mr. Johnson purchased a home for $100,000 and paid $2,000 for buying expenses (closing costs). His original basis is: OB = $100,000 + $2,000 = $102,000
ADJUSTED BASIS AB = OB + CI Where: AB = Adjusted Basis OB = Original Basis CI = Capital Improvements
Mr. Stigler has an original basis of $102,000. During ownership he made a room addition for $20,000 and did landscaping, that cost $12,000. His adjusted basis is: AB = $102,000 + $32,000 = $134,000
GAIN G = SP – SE - AB Where: G = Gain SP = Sales Price SE = Selling Expenses AB = Adjusted Basis
Mr. Ball sells his home for $250,000 and it cost him $24,000 to sell the property. His adjusted basis is $134,000. G = $250,000 - $24,000 - $134.000 = $92,000
TYPES OF GAIN Realized Gain Recognized Gain Excluded Gain
Mr. Ball in the last example had a realized gain of $92,000. He will either recognize the gain, pay taxes on the gain, exclude the gain, or not pay taxes on the gain.
EXCLUDED GAIN A Single person can exclude $250,000 A married couple can exclude $500,000 To qualify for exemption, the home must have been a principal residence for at least 2 years during a five year period prior to the sale. Only one spouse must be the owner during this time period. But both spouses must have lived there for a 2 year period.
1 2 3 4 5 X X Mr. Ball purchased a home and lived in it the 1 st year and the 2 nd year. He sells it in the third year. He qualifies for the exclusion EXAMPLE #1 OF THE EXCLUSION
1 2 3 4 5 X X Mr. Ball purchase a home and lived in it the 1 st year and the 5 th year. Therefore he lived in the home two out of the last five years. He qualifies for the exclusion. EXAMPLE #2 OF THE EXCLUSION
Mr. Ball sold their home and had a gain of $52,000. They lived in the home for 5 years. Thus, they can exclude the $92,000 gain. Put it in his pocket and run. The full exclusion can be used once every 2 years.
Mr. Jandists (single) sells his home for $500,000. His adjusted basis is $100,000. His gain is: $400,000 = $500,000 - $100,000 He can exclude $250,000 and the remainder is taxable at capital gain rates. $400,000 - $250,000 = $150,000
CAPITAL GAINS Homes and investment properties receive special tax considerations. They are taxed as capital gain. There are two types of capital gain: (1) short term (2) long term. If a property is held for one year or less (short term), then it will be taxed at the 27% tax rate.
SHORT TERM Mr. Ford procures a house that he rents on April 15, 1999 and sells on April 15, 2000. Since the time held is exactly one year, it is short term and in the 27% tax bracket and if he has a $100,000 gain. The taxes would be $27,000.
LONG TERM If the property is held for more than one year it will be taxed as long term capital gains. The are two long term capital gain rates, and they are based on the client’s tax bracket.
If the seller is in the 15% tax bracket the capital gains will be taxed at 10%. If the client’s tax bracket is greater than 15%, the capital gains will be taxed at 15%.
Mr. Rooks (single) sells his home for $500,000. His adjusted basis is $100,000. His gain is: $400,000 = $500,000 - $100,000 He can exclude $250,000 and remainder is taxable at capital gain rates. $400,000 – $250,000 = $150,000 $150,000 × 15% = $22,500
REVIEW OF ORIGINAL BASIS OB = PP + BE Where: OB = Original Basis PP = Purchase Price BE = Buying Expenses
The ratio of building to land is usually determined from the property tax rolls. USING THE PROPERTY TAX BILL When examining what portion of the property is land and what portion is building. Remember you cannot depreciate land.
Edmund Riggs The County Tax Assessor 12345 E. Main St. Sunset City, CA 99999 Ms. Sarah Giocomo 1870 Elm Lane Sunset City, CA 99999 Date: 7/01/YY Land 3,000 Improvements 7,000 Total 10,000
% of Building: 7,000 ÷ 10,000 x 100 = 70% % of Land: 3,000 ÷ 10,000 x 100 = 30% Therefore, only 70% of the purchase price maybe depreciated.
DEPRECIABLE BASIS DB = OB x %I Where: DB = Depreciable Basis OB = Original Basis %I = Percentage of Improvements
Maria Hernandez purchased a residential fourplex for $490,000 and buying expenses of $10,000. It has been determined the building is 70% of the value of the property. The depreciable basis is: OB = 490,000 + 10,000 = 500,000 DB = 500,000 x 70% = 350,000
COMPUTING DEPRECIATION OF REAL PROPERTY There are two types of real property: 1. Residential (27.5 or 40 years). 2. Non-Residential (39 or 40 years)
Residential and Non-residential property use different depreciation schedules. Non-residential Residential
John Jones purchased a residential fourplex on May 1 st this year. The DB is 350,000. Depreciation Schedule 3 2.879% 3.636% 4 2.576% 3.636% 5 2.273% 3.636% 6 1.970% 3.636% 7 1.667% 3.636%
1 st year depreciation: 350,000 x 2.273% = 7,956 2 nd year and after: 350,000 x 3.636% = 12,726
Mr. O’Hara held the property for almost 10 years. He purchased it on June 1 st , he held the property 7 months the first year and 9 more years. He sold it December 31 st this year. The depreciable basis is $250,000. 1 st Year $250,000 x 0.01970 = $4,925 Additional years: 250,000 x 0.03636 = $9,090 $4,025 + (9 x $9,090) = $85,835
ADJUSTED BASIS AB = PP + BE + CI - D Where: AB = Adjusted Basis PP = Purchase Price BE = Buying Expenses CI = Capital Improvements D = Depreciation
Mr. Lawson purchased a fourplex for $490,000 and buying expenses of $10,000. He has made capital improvements of $60,000 and has taken $122,490 in depreciation. His adjusted basis is: AB = 490,000 + 10,000 + 60,000 - 122,490 = $437,510
GAIN G = SP - SE - AB Where: G = Gain SP = Sales Price SE = Selling Expenses AB = Adjusted Basis
Rental sold his fourplex for $750,000 and with expenses of $60,000, 6% for the agents and 2% for costs, a total of 8%. His gain is: G = 750,000 – 60,000 – 437,510 = 202,490
This gain is taxed at capital gain rates. Since the property was held for more than a year the property will receive long term capital gain treatment. Be taxed at the 15% rate. 202,490 x 15% = 21,261