Three types of deductions allowed when calculating taxable income from investment real property:
1) Operating expenses: cash necessary for running and maintaining property; deductible in the year paid; property taxes are operating expenses; property taxes are deductible; reserve for replacement deducted when determining NOI, it is not a cash expense and not deductible when computing taxable income. Replacement expenses are deductible in the year paid.
2) Financing expenses: interest and cost to borrow money. Mortgage interest is deductible but principal payments are not. Loan origination fees and points (cost of obtaining a mortgage) must be amortized over the life of the loan.
3) Depreciation: deduct the cost of improvements to land over a specified period of time; land itself is not depreciable; Depreciation allows tax payers to pay less than they would have to pay; depreciation deduction bears little relationship to actual changes in property value. Depreciation is used to make investment property more attractive to investors by allowing deductions in taxes. Depreciation is only allowed for business property and investment property or income producing property. Personal residences and inventory property do not get depreciation tax deductions. Depreciation requires no outlay of cash. Property taxes and mortgage interest require an outlay of cash. Depreciation is based on the total cost of improvements. Including the portion paid with borrowed funds.
The depreciable basis is the amount that may be depreciated. Real property means cost of acquisition, cost of real property less the value of the land the property is on. Depreciation: cost to get the borrowed money + cost of the building - value of the solid land. Costs in acquiring money include attorney's fees, appraisal fees, survey fees, and title insurance costs. LAND IS NOT DEPRECIABLE. Depreciable basis is combination of the building and the land. Building has a value, and land has a value.
Straight line method to calculating depreciation takes the depreciable basis (building plus cost - land) and divides it by 27.5 years (residence) or 39 years (income-producing). Yearly depreciation on an income producing with depreciable basis of $400,000 is 400000/39 = 10,256 yearly depreciation. Life span of residence is 27.5 years. Life span of income producing is 39 years.
When an income producing property is sold for cash, a gain or loss must be reported to the IRS immediately for income tax purposes. The total realized gain for the sold property is the selling price less the expenses (so, net sale price - depreciation). Seller pays tax on the gain of the sale in the year the gain is made. Like kind exchange or installment method may give tax benefits.
Installment method cannot be used if the property received a loss. Loss must be recorded in year of the sale. Early tax counsel is mandatory for installment method. Installment method allow the seller to be paid the gain over time and pay the taxes at the same time the gain is coming in. A seller doesn't have to pay tax on a gain not yet collected. Gain is treated as a part recovery part profit of investment fund.
A real estate investor can defer paying taxes by exchanging real property. Income tax is deferred but not eliminated. A like kind exchange allows the investor taxpayer to pay tax later and enjoy the appreciation and benefits of investment immediately. The capital gain is taxed when the investor sells the property. Like kind can be exchanged for a different type of property: office complex for multifamily complex. Boot is the additional capital or personal property exchanged to balance the trade to fairness. There is tax on the boot. Whoever receives the boot pays tax on it right when the boot is received. Personal residences and foreign property do not qualify for like kind exchanges. The IRS has strict rules for like kinds. Like kinds must be carefully structured.
A tax shelter is an advantage for owning real estate. An investment is a tax shelter when it shields income or gain from payment of income taxes. A tax sheltered real estate investment feature is depreciation. Depreciation is a key deduction because it does not involve an outlay of cash. Depreciation protects a portion of your income from income tax. Depreciation can even result in a tax loss giving you more income. Under the tax code, sheltering of income is restricted due to income classifications (active, portfolio, or passive). A sound real estate investment depends on the productivity of a property, not on its tax aspects. A good investment combines positive cash flow with appreciation of property value. A property is not a tax shelter if it decline in value below the depreciable deduction allowed for tax purposes.
Federal income tax laws encourage investment. Benefits include: allowable deductions from income, tax deferrals and exemptions on resale, installment sale treatment, and like-kind exchanges. To get the most fair treatment, seek advice. Advance planning is needed for an investor's tax return to be maximized. Tax purposes classifies income into three categories:
1) Active income including wages tips, and commission
2) Portfolio income including income from interest, stock dividends, capital gains, royalties, and annuity incomes
3) Passive income including activities which the taxpayer does not participate. Income from rental or leased property is passive income. An income loss from a passive income cannot be used to reduce active and portfolio taxes.
Investors in real estate properties should consult a specialist. A capital asset is a real estate, stock, or bond that is owned for investment purposes. Capital gain or capital loss is the difference between what you paid for it and what you sell it for. Sell for more = capital gain. Sell for less = capital loss. Capital gain taxed at capital gain rate. A capital gain from real estate can be used to offset a capital loss from another prospect. If the losses exceed the gain, then the investor can deduct $3,000 from taxes owed.
Investor has two properties. One earns a capital gain of $10,000, and the other has a capital loss of $15,000. The investor can offset the $10,000 gain with $10,000 of the loss. This leaves a net $5,000 loss of which the investor can deduct $3,000. The investor must carry forward the remaining $2,000 loss to the next year. As previously discussed, a loss from the sale of your personal residence is not deductible. One gets ten and one loses fifteen. So the investor only lost $5,000 total and can take off $3,000 so only has $2,000 in losses and carries this $2,000 to the next year. A loss from the sale of your personal residence is not deductible.
The Federal Government sets provisions for income taxes for home owners and home-type investors. Federal tax laws affect the benefits that may be obtained from home ownership, purchase, and disposition. You must consider taxes when owning and investing in property. Tax laws for property and investment property are complex. Tax laws are designed to benefit people to own property, in particular residence. Home, houseboat, townhouse, condominium, and mobile home is same with property tax laws and has tax benefits. Homeowners itemize deductions instead of group deductions all together:
1)Mortgage interest is deductible
2)Annual property taxes are deductible
3) Interest on home equity loan up to $100,000
4) Mortgage origination points : mortgage origination points only deductible in year paid since origination loan are one time -- if you refinance a loan then you pay over the life of the loan
5) First time home buyers -- $10,000 out of IRA without penalty
6) Capital gain principal residence $250,000 single $500,000 married if you sell and make capital gain
Capital asset is classified as real property. Capital gain is profit from sale of property and capital gain is from a principal residence, investment property, property used in trade or business, or income producing property and must be reported. (capital gain must be reported so you pay taxes on it unless you are selling your principal residence and make less than $250,000 alone or $500,000 with someone. Taxable gain is based on the amount realized from the sale and the adjusted basis. The gain on a property you sell is the amount realized less the adjusted basis.
Formula for amount realized from a sale is sale price - expenses
Adjusted basis is owner's original cost of property plus expenses plus capital improvements
Original purchase price + purchase expenses and capital improvements = adjusted basis
The capital gain or loss is the amount realized - adjusted basis = total profit or loss
Profit from selling principal residence is a deduction because it is a capital gain but loss on selling a principal residence is not deducted. Up to $250,000 or $500,000 is allowed as deduction on principal gain. Any rate above 25000 or 500000 is taxed. Exclusion is allowed for residents reside in the property two years during the 5 year ending of the sale. You don't have to re-invest in a property to gain your inclusion. You can keep the money and do whatever you want with it. Exclusion of gain allowed once every two years. A prorated exclusion of gain may be given to those who experienced job transfers, health issues, or other allowable reasons within the two years.
If a foreign seller is selling US property and a US person wants to buy it then the buyer has to withhold 10% of the gross sale price and give it to the IRS so that no foreign seller can get away with not paying tax associated with selling real property. Buyers and foreign seller can consult a tax specialist or the IRS for current laws. Tax laws are complex and constantly changing. Retain a professional regarding tax circumstances. A home equity loan may help or harm the borrower. Interest on a home equity loan is tax deductible. Mishandling finances is disastrous. Careful homeowners get benefits.
Investment property is not principal residence property.
A special assessment is a special tax - a one time assessment of how much each property owner will have to pay to get a public project completed. An old septic tank getting a sewer is an example of special assessment tax. A road getting paved is an example of a special assessment tax. An upgrade is an up in property value. Right? If not, you can look for relief from the courts, if your property value was lowered by the improvement. Like if your street was quiet and then it was widened to a four lane street and is now noisy. Danger to children, pollution, high traffic volume, and noise are decreases in property value. If the tax is imposed then the improvement must increase the value. Courts rule in favor of home owner's all the time by providing relief to properties conversely affected. Special assessments are not ad valorem taxes. A special assessment tax amount is not based on the value of the property. A special assessment is charged by the frontage of new improvement: like frontage of sidewalk or length of sewer, and frontage of street. Sometimes per hookup is the way to levy taxes on utility and sewer improvements. Like if you have an unpaved street the city is paving. Owner can buy back certificate from tax collector office if face value and interest paid off. Then the bidder gets refund. A tax deed can be enforced by an owner of a tax certificate after two years but no more than 7 years. Tax cert. expires 7 years from date of issue. Anyone can bid at the foreclosure sale and property goes to highest bidder. Certificate holder gets face value plus interest back if unsuccessful bidder. If no one bids the certificate owner gets a tax deed. Property then transferred by tax deed and liens including mortgages wiped out except government liens.
A property tax is a lien superior to all other liens. Special assessments are next. #1 property tax. #2 special assessment. The government will take steps to get your property taxes from you. Florida considers property tax a debt (like a promissory note signed by home owner promising to pay property taxes assessed). Property is security for debt and can be sold to get the money. Day to day operations of counties and cities are paid by taxes and they must collect. A delinquent property gets a tax certificate. The county newspaper gets list of properties delinquent. Tax certs. on property are sold if unpaid. There is a public auction for taxes in arrears. Electronic online sales of tax certificates can be conducted. Any bidder can bid on tax certificates at auction. Investor's bid rates instead of dollars at the auction and start at 18% and go down. Bidder must pay face value, interest, and advertising.
Computing current taxes:
- current tax rates
- assessed value
- eligible exemptions
Dollar amount of property taxes owed = taxable value of property multiplied by tax rate. Tax rate is expressed in mills. A mill is one-one-thousanth of a dollar. Mill = 1/10 of a cent. There are 1,000 mills in a dollar. 1 dollar - 1,000 mills. .010 tax rate is 10 mills. Florida cities, counties, and municipalities can charge no more than 10 mills each per real property. One mill is .001. Ten mills is .010. One hundred mills is .100. One thousand mills is 1.00. Ten thousand mills is 10.00. One hundred thousand mills is 100.00. To decimal point mills to mills .010.. move the decimal point over three spaces so .010 is 10. .100. is 100. .001 is 1. Always use three digits when expressing tax rates. One mill is .001. .010 is one cent. .010 is also 10 mills. (.010 is 10 cents and 10 mills). Use three digits in tax rates. .001. .010. .100. 1.00. 10.0. .009 is 9 mills. .010 is ten mills. .008 is 8 mills. .011 is 11 mills. .007 is 7 mills. .012 is 12 mills. Converting millage to decimal form is moving decimal place over three places. so 20.0 is .020 mills. 25.9 mills is .0259. To determine tax rates use this formula: Approved budget - non property tax revenue/total assessed value - exemptions = tax rate.
Tax rate - budget - revenue over value - exemptions. .010 is 10 mills and 10 mills per every taxable dollar.
(budget minus revenue divided by assessed value - exemptions)
Always apply the tax rate in mills to the taxable value.
Two types of value are involved in calculating property tax. Tax rate in mills is always applied to taxable value and taxable value is exemption deducted from assessment. If property gets no tax exemptions for some reason then the assessed value is the same as the taxable value. Always multiply the tax rate (mills) by the taxable value (assessment - exemption) to get the amount of tax the property owner owes. Since operating budget and revenue change, tax rate (mills) changes annually. Not all property owners pay the same tax rate. City home owner pays city, county, and school board tax. If voters approve bonds tax then those taxes too. Country home owner pays county and school board taxes. City only pays city taxes (and maybe bonds). Some districts have special tax districts and those residents pay those taxes as well as basic taxes.
"For example, Mr. Pasco's homesteaded single-family residence has an assessed value of $350,000. The millage rate for the school district is 6 mills, city 7.1 mills, and county 8.2 mills. How much is owed for school district taxes? How much is owed for city and county taxes? What is the total property tax bill for this property?"
350000 - 25000 = 325000 x .006 = 1950
350000 - 50000 = 300000 x (7.1 + 8.2) 15.3/.0153 = 4590
1950 + 4590 = 6540
school board $25000 exempt
property over 75000 city and county additional 25000 exempt
50000 exempt total
"Mr. Pasco is interested in finding the amount of savings in property taxes realized from the tax exemptions. What is the amount of savings to the homeowner resulting from the homestead exemption applied to school board taxes? What is the amount of savings resulting from the homestead exemption applied to city and county taxes? What is the total amount of savings from property taxes realized by this homeowner?"
school board 25000 x .006 = 150
county and city 50000 x .0153 = 765
150 + 765 = 915 total savings (homestead exemptions)
Powers are delegated by the state of what tax can be imposed on real property. Numerous tax districts, city, county, and school board impose taxes. The Federal gov. is prohibited from taxing real property because the Constitution says so. The Feds pass the right to tax on to the states and local governments (cities and counties). Florida is one of the states that does not tax real property at the state level.
- adjusted basis
- ad valorem - taxed according to value
- assessed value
- boot
- capital gain
- depreciation
- exempt
- Green Belt Law
- immune
- just value
- mill
- partially exempt
- special assessment
- taxable value
- tax shelter
There is a protest procedure for taxes and a county property taxation process. What's the bulk of local revenue in counties in Florida? Property taxes. Fire fighters, police officers, and others are paid from the property tax revenue. Price of property tax based on value of property (ad valorem is value of). County property appraisers must assess value for all real property in Florida, thus not duplicating or having tax controversy. Real property assessments are every year. Property taxes are based on calendar year. Jan 1 tax year begins. Dec 31 tax year ends. Mar 1 filing for tax exemption ends. Apr 1 delinquent property tax for previous year if not paid. Nov 1 property tax payable for current year. Taxes are paid at the end of the year, close to Dec 31. Property tax holds the top spot on lien standings. Pay property tax to county tax collector on or after nov 1. Four installments or one single payment of property tax. If you pay promptly you get a discount. All payments for taxes levied must be paid on or before Mar 1.
Property tax are against land and land improvements. Add them together to get the combined assessed value. Just value is the assessment in Florida. Just value is location, size, and condition. Also consider the highest and best use of the land and income generated from the property. Just value is calculated into ad valorum basis but not conforming to market value. A property appraiser will find the assessed value through comparable analysis, cost depreciation and income approach. Sale price is a contributing but not controlling factor. County appraisers have specific forms and recording procedures for going into the community and assessing the value of a property. There is a computer to enter details from field trip to arrive at assessed value. Assessed value is value arrived at for tax purposes. If an assessment is placed owner is informed: Notice of Proposed Property Taxes: truth in millage notice. Owners keep current mailing address on file. Owner must receive truth in millage in time to protest. Just because you protest doesn't mean you win. A home owner of a standard lot will probably lose unless surrounding lots protest and win as well. Standard is standard. If a home is assessed at a greater value than justified the home owner will protest. Assessed value of similar structures, square footage, year built, construction materials, and amount of estimated depreciation. If you feel your home is not assessed at fair market value or the assessment is inaccurate then, contact the county appraiser within 25 days of truth in millage notice. If the adjustments are in fact the county appraiser can adjust the amount. Owner can file an appeal with the Value Adjustment Board after the county appraiser says no: two country commissioners, one school board member, two citizen members: agree with taxpayer that assessment too high, Board can adjust. Board disagree's then tax payer rejected and has to pay. You can litigate in court as your final step. Certiorari proceeding is when you pay the tax and then file a suit against country appraiser and tax collector. There is a statutory period to file the suit. The court can assess the methods the county appraiser used but cannot assign a value to the property. Court can order the original assessment just and equitable. You can always appeal to a higher court than county court.
Every fiscal year, each tax district (city, county, school board, or special tax district) prepares an operating budget for the next fiscal year. Several departmental budgets is the one budget: fire, public works, library, police officer, health, welfare, finance. District knows how much tax money they need next year to pay for their proposed budget. Property taxes are necessary to operate the district. Find out the revenue from sources other than property taxes first: outright grants and municipally owned utilities: fines paid in court, certifications and licenses, parking meters. Preceding years give a predictable trend. How much exactly is needed from property taxes? Taxes are paid from tax base: total assessed value of all properties in district. Find out the number and type of exemptions granted. You can be exempt or partially exempt:
1* immune: city, county, state, and federal government property -- courthouse and military, municipal airports. Immune properties are not assessed and taxed.
2* exempt: churches and non-profit organizations -- subject to taxation but owner is released of responsibility.
3* partially exempt: owner relieved of partial burden -- homestead property. That is why assessed value is not taxable value. Taxable value is when the exemptions are subtracted from the assessed.
Any Florida homeowner using their home as a primary residence can classify it as a homestead property. Homestead property is classified as a partially exempt property meaning your taxes are reduced. Only one property is allowed to be homestead per person. Even if you have more than one property you can only homestead one property. Homesteading is called principal residence. First time applicants must file an application before Mar. 1. Residents must reside in the home and have legal title before Jan. 1 to get homestead exemption. Some counties allow filing throughout the year. If the application is filed after Mar. 1 the homestead exempt doesn't help until the following year. Renewing a homestead exemption varies from year to year. The property appraiser will mail you a renewal card on or before Feb. 1. Once the initial application is in place the county may choose to waive the each year renewal criteria. The law will get your missed interest and payments from you if you move out of your homestead property and don't notify the courts. Lying about homesteading is lying about property taxes. Homestead homeowners are entitled to a $25,000 exemption from the assessed value of the home for city, county, and school board taxes. If the assessed value is between $50,000 and $75,000 the owner gets an additional $25,000 exemption. Homestead properties with value more than $75,000 get the full $50,000 exemption from school board taxes and city and county school board taxes. Homestead homes valued under $75,000 get base $25,000 exemption. Property tax exemption for homestead is subtracted from the assessed value for the total owed in property tax.
Florida tax exemption info: http://dor.myflorida.com/dor/property/taxpayers/exemptions.html
Homestead tax exempt form:
http://dor.myflorida.com/dor/property/forms/current/dr501.pdf
Assessed value - homestead exemption = tax value
$25,000 = $25,000
$25,001 - $50,000 = $25,000
$50,001 - $75,000 = $25,000 and $25,000 for amount that exceeds $50,001
$75,001 and greater = $25,000 and $25,000 more so $50,000
Additional $500 exemption goes to widows, legally blind, and nonveterans who are totally disabled. The disability must be certified by the Social Security Administration, Division of Blind Services, or a Florida physician. Additional $5,000 is given to homestead exemption for veterans who are 10% disabled by service connected misfortune. Total exemption from property taxes on homestead property is for 100% disabled veterans.
Veteran related read estate agents: http://www.veteransunited.com/va-loans/realty/
The widower of a death of a military man can get you this 100% homestead exemption. Additional exemptions given to some veterans, deployed active duty military personnel, and surviving spouses of first responders. 65 and older exemption gets an additional $50,000 exemption. Income restricted to no more than $20,000 to qualify. Counties can pass or not pass this ordinance to people over 65 making less than $20,000. A homestead owned by a quadriplegic is completely tax exempt. Total permanent individuals with low income can be totally exempt. Taxable value of homestead property is assessed value minus homestead category. Each person has own particular homestead ownership. Therefore, a widower with property more than $75,000 gets $50,500 deduction and a legally blind widower with property more than $75,000 gets $51,000 in exemptions. Just add on the $500's for widows, blind, and totally disabled nonveterans.
Green belt law and save our home amendment to the Florida Constitution. Agricultural land gets its own form of assessment. If a taxpayer's land is classified for tax assessment purposes then the assessment is based on the land's current use and characteristics. Agricultural property is not appraised for the highest and best use of the land. Just because agricultural land is in a land well suited for development or in the path of urban growth, does not mean the assessment is based on that fact -- says the Green Belt Act. A farmer could be moved off the land for not having funds to pay for tax bracket. There are lower tax impacts on agricultural land, which is what attracts developers to it. Speculators call the Green Belt Law tax protection but farmers call it protection for the farmer. Green Belt Law states that all county property appraisers must classify the land each year. If you want to reclassify your land you must before Mar. 1. You can appeal denial of land reclassification with other owners who were denied. Dave Our Home caps how much can be homesteaded each year. Value of homestead property can increase after 3% of last year or the percentage of change from the CPI. SOH benefit is difference between assessed value and market value. SOH is portable. Homestead exemption on current home can transfer to new home if homestead was in place over 2 years. Transfer up to $500,000 to new home from SOH. Moving to a nicer home gets you the full $500,000. Down grading gives you the same amount of homestead from which you transferred from. You can calculate the portability benefit for transferring homes. If a homestead property is sold, then the value as of Jan. 1 is the assessed value for the change in ownership. If the man before you lived in the house a long time and the property increased then the new owner is going to get an increased homestead value. Don't base a new home owner's taxes on the previous owner's taxes. Give your purchaser a disclosure about property taxes. The disclosure says that the new owner's cannot rely on the previous owner tax information. Sale of the property triggers a reassessment of property worth. Ask the county appraiser office how much tax you will pay for your future home.
