Chapter 15 Taxes and Assessments

1. Chapter 15Taxes and Assessments

2. Review Gov’t Limitation of Private Ownership of Real Estate • Taxation (Ad valorem and Income) • Escheat • Eminent domain • Police power

3. I. Ad Valorem Taxes Administering Property Taxes • First step, identify all properties and estimate their values • Second step, develop a budget and tax rate. • The budget is determined by the appropriate government officials based on the costs of providing government services to the community (police and fire protection, schools, libraries, street, etc.) • Dividing the budget amount by the tax digest (total value of properties in the jurisdiction) yields the tax rate necessary to generate the budget amount. • Third step, bill the property owners and collect the taxes.

4. Key Terms/Calculations • “Ad valorem” tax • Millage rate • Assessment ratio • Exemptions • The tax bill for a property with a market value of $120,000 in a jurisdiction that assesses a millage rate of 25 mills on 40% of a property’s market value and permits a exemption of $2,500 for this type of property is calculated as follows:

5. Tax Bill Calculation Market Value $120,000 multiplied by Assessment Ratio x .40 equals Assessed Value $48,000 minus Exemptions (if any) -$2,500 equals Taxable Value $45,500 divided by 1000 1000 times Millage Rate x 25 equals Property Tax $1,137.50

6. Mill Rate Dollars per Dollars per Hundred Thousand School 40 mills $4.00 $40.00 district City 30 3.00 30.00 County 10 1.00 10.00 Total 80 mills $8.00 $80.00 Expressing Property Tax Rates

7. Calculations using Mills • Tax appraised value • Assessed value • Millage rate (e.g., 80 mills; see previous slide) Move decimal: • 85 mills = .085 • 215 mills = .215 • 5 mills = .005 Result: Tax Bill

8. Other Taxing Matters • Unpaid property taxes • Assessment appeal • Property tax exemption • Property tax variations • Special assessments

9. II. Income Tax on Sales • Ordinary Sales • Installment sales

10. A. Ordinary Sales: • Basisis the price originally paid for the home plus any fees paid for closing. [Purc. price + Closing costs +Commission = Basis] • Adjusted basis: basis plus improvements. [Basis + Improvements (if any) = Adjusted Basis] • To calculate the gainyou must take the sale price and subtract the selling expenses (“amount realized”) [Selling price - Selling expenses = Amt Realized]. Then subtract the basis (adj. basis) to determine the gain. [Amt realized – Basis (adj. basis) = Gain (loss) on sale]

11. Calculation of Gain Purchase price $90,000; closing costs are $500 Basis $ 90,500 Add landscaping and fencing for $3,500 Basis $ 94,000 Add bedroom and bathroom for $15,000 Basis $109,000 Sell home for $125,000; sales commissions Amount realized $117,000 and closing costs are $8,000 Amount realized $117,000 Less basis -$109,000Equals gain $ 8,000

12. Capital Gains Tax Rate • 15 percent • If property held longer than 1 year

13. Income Tax Exclusion • Sale of principal residence • Used for 2 of the last 5 years • Married – exclude up to $500,000 gain • Single – exclude up to $250,000 gain

14. Adjusted Sales Price Selling price of old home Less selling expenses Less fix-up costs Equals adjusted sales price $250,000 -18,000 -7,000 $225,000

15. III. Miscellaneous A. Tax Deductions B. Interest Deductions C. Conveyance Taxes