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Unit 18: Key Points

These are the most important points for you to remember in this unit.

Real Property Taxation 

  • Ad valorem taxes—primary source of revenue for cities, counties, and schools.
  • Property taxes are ad valorem taxes, based on the value of real property.
  • The county property appraiser appraises real property for counties, cities and school boards.
  • The county property appraiser must appraise real property at current just value, synonymous with market value.
  • A Truth in Millage (TRIM) notice is sent to property owners in August each year informing taxpayers of the tax liability and shows which governmental entity is levying the tax.
  • A property owner who wants to protest the tax bill would use the following steps:
    • Contact the property appraiser.
    • File a petition with the Value Adjustment Board.
    • File Suit in the courts.
    • If the court suit is not successful, the property owner would ask a superior court for a certiorari proceeding (an appeal).

Tax Districts, Budget, and Tax Rates 

  • Immune properties are not even assessed. City, county, state and federal government properties are immune from taxes.
  • Exempt properties include churches and charities. Other partial exemptions go to homeowners, surviving spouses, disabled persons, blind persons, and an agricultural green belt exemption.
    • The homestead tax exemption reduces the taxable value of a property provided owner resides in home as his/her primary residence.
    • The owner gets only one homestead exemption.
    • From the first $50,000 in taxable value, the homeowner may exempt $25,000.
    • If the house is valued for more than $75,000, the owner can exempt another $25,000 from city and county taxes (but not school taxes).
  • Save Our Homes (SOH) Benefit
    • Annual increases in assessed value of homestead property is a maximum of three percent or the change in the Consumer Price Index, whichever is lower.
    • If the property is sold, caps and exemptions are removed at the end of the calendar year.
    • Taxes for the following year are then calculated on the full just value.
    • The portability provision of the law allows homestead property owners to transfer the accumulated difference between assessed value and the just value.
  • Additional exemptions on Homestead Property include $5,000 for blind persons, surviving spouse who has not remarried, and totally and permanently disabled nonveterans.
  • The taxable value of a homestead property is calculated by deducting all the exemptions from the assessed property value.
  • To calculate property taxes, multiply the property’s taxable value by the tax rate of the taxing authority.
  • The tax rate is expressed in “mills” which is one one-thousandth of a dollar ($.001). 25 mills would be .025 (which also happens to be 2 ½% of the value).
  • Cities, counties, and school boards are limited to a maximum of ten mills, except for voted-on bond issues.

Special Assessments

  • A special assessment is a one-time tax levied on properties which have been improved by the government.
  • They are second in priority to property taxes. Special assessments are not “ad valorem” taxes, and are based on the cost of the improvement divided by the owners who have benefitted.
  • Special assessments are often levied on a front foot or on a square foot basis.
  • If you are calculating a special assessment, remember to divide the running foot price by 2 in order to get the front foot price on one side of the street.

Nonpayment of Real Property Taxes

  • Delinquent Taxes—ad valorem tax payments are due on November 1 for that year.
  • The taxes become delinquent April 1 of the following year.
  • A tax certificate, which is a lien against the property, will be sold on or before June 1st.
    • A tax certificate is an enforceable first lien against the property for unpaid real estate taxes.
    • The life of a tax certificate is seven years.
    • If the purchaser of the certificate holds that certificate for a period of two years from the date of delinquency and the property owner does not pay the tax, the certificate holder may file a tax deed application with the Tax Collector on April 1st.
    • The property owner is notified of this action and if the owner still does not pay the taxes, the property will be sold to the highest bidder in a public sale conducted by the Clerk of the Circuit Court.

Federal Income Taxes

  • Sale of real property—the sale of real property is a taxable event. The taxes due on the sale will depend on:
    • the amount realized from the sale,
    • the adjusted basis of the property,
    • whether it was a gain or a loss,
    • the length of time the property was owned, and
  • amount realized from the sale—the sale price minus any commissions or fees paid.
  • Adjusted basis—is the acquisition costs, any capital improvements, less allowable depreciation (if this is an investment property).
  • Capital Gain (Loss)—is calculated by subtracting the adjusted basis (what you paid) from the realized amount (how much you sold it for).
    • If you sold your assets for more than you paid, you have a capital gain.
    • If you sold your assets for less than you paid, you have a capital loss.
    • If you held the property for less than one year, the IRS considers that a short-term gain.
      • You’ll have to pay taxes at your normal tax rate.
    • If you held the property for one year or more, it is a long-term capital gain. The tax rates are lower, with a maximum rate of 20% or the gain.
    • If the property has been your personal residence for at least two years, all or part of the gain is excluded from taxation,
  • Tax advantages of owning your principal residence.
    • Mortgage interest deduction on principal residence and second home with a total value of up to $750,000.
    • Deduction of up to $10,000 in property taxes on principal residence and second home.
    • IRA withdrawal of up to $10,000 for first time home buyers without having to pay a penalty.
    • Exclusion of up to $250,000 gain from sale of principal residence ($500,000 for married couples filing jointly). The property must have been the principal residence for at least two of the previous five years. Any gain above those limits are taxed as capital gains.
    • Interest on home equity loans used to pay for home improvements is deductible. Home equity loans used for other purposes are not deductible.
  • Loan origination fees and points made to purchase a principal residence are deductible in the year they are paid.
  • When a person who is not a U.S. citizen sells property, the Foreign Investment in Real Property Tax Act (FIRPTA) may require the buyer to withhold up to 15 percent of the amount realized on the sale.
  • Determining taxable income on investment property.
    • Reserves for replacements is NOT deductible.
    • Depreciation is deductible. Residential property improvements are depreciated over 27.5 years; non-residential property is depreciated over 39 years.
  • Capital Gain (Loss)
    • Capital losses can be used to offset capital gains.
    • The tax law limits the amount of capital loss that is deductible to $3,000 per year; the balance is carried over to future years.
  • The tax law allows the seller to pay taxes as the payments are received, rather than in the year of sale. A portion of each payment is interest income.
    • The principal portion of the payment is divided into the seller’s basis in the property, and into the seller’s profit.
  • Like-Kind Exchange—called Section 1031 tax-deferred like-kind exchange. To qualify for a tax-deferred exchange, investment real property must be exchanged for like-kind investment property.
    • If the owner of the office property receives cash or any other asset in the exchange, it is called “boot” and is taxable.