Chapter 15 Taxes and Assessments

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Chapter 15Taxes and Assessments

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Property Taxes

• Property taxes are the largest single source of
  income for most local governments they are used
  to fund the public services provided by local
  governments
• Most property taxes are ad valorem taxes, meaning
  they are levied according to the value of
  property
• Property taxes are levied by each local taxing
  jurisdiction against taxable property located
  within the jurisdiction.
• A single property may be subject to tax by many
  taxing jurisdictions the city, the county, one
  or more school districts, other special
  districts. However, property taxes are generally
  collected for all local taxing jurisdictions by
  one governmental unit, usually the county.

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Mechanics of the Property Tax

• The process of determining the amount of property
  taxes to be collected each year is generally as
  follows.
• Each taxing jurisdiction estimates its
  expenditures for the coming year, which is the
  total amount of revenue the jurisdiction needs.
• Revenues that are obtained from non-property tax
  sources are estimated. These include various
  types of user, license, and other fees, fines,
  sale of services, local sales taxes and income
  taxes, money from the state and federal
  governments.
• All such revenue is aggregated and then
  subtracted from the total amount needed to be
  raised. The balance comes from property taxes.

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Determining the Tax Rate

• The basic formula for determining the tax rate
  for each local jurisdiction is
• RT (EB IO) / VA
• Where
• RT a jurisdictions tax rate
• EB budgeted expenditures
• IO income from sources other than the property
  tax
• VA the assessed value of all taxable property
  within the jurisdictions boundaries
  (the jurisdictions tax base)

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Determining the Tax Rate (Cont.)

• Suppose a local school district, the Painted
  Hills School District, has budgeted total
  expenditures of 12 million. Revenue from the
  state and federal government and from other
  non-property tax sources is 4M. The assessed
  value of total taxable property within the school
  district is 200M. Thus the tax rate for the
  school district is
• RT (12M 4M)/200M 8M/200M .04, or 4
  cents per dollar of assessed valuation
• This can also be expressed as 4 per 100 of
  assessed valuation, or 40 per 1,000 of assessed
  valuation, or 40 mills.

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Millage Rate

• In many states, tax rates are commonly expressed
  as a mill, or millage, rate. A mill is one
  thousandth of one dollar, or one-tenth of one
  cent (.001).
• For example, 6 mills converted to decimal is
  .006, or 6 tenths of one percent.
• Using the school district example, a 4 cent tax
  rate equates to 40 mills (10 mills per cent x 4
  cents).
• A tax rate of 40 mills is also expressed as a
  rate of 40 per 1,000 of assessed value.

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Determining the Tax Rate (Cont.)

• Assume a property is located within three
  taxation districts Monroe County, the city of
  Eastfork, and the Painted Hills School District.
• The county governments budget requires 20
  million from property taxes, and the county
  contains 2 billion in taxable assessed
  valuation. This makes the countys tax rate 1
  cent per dollar of assessed value, or 10 mills.
• The city of Eastfork requires 3 million from
  property taxes, and it contain property with a
  total assessed value of 100 million. Thus the
  citys tax rate is 3 cents per dollar of assessed
  valuation, or 30 mills.
• As we previously illustrated, the school
  districts tax rate is 4 cents per dollar, or 40
  mills.

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Determining the Tax Rate (Cont.)

• The combined tax rate for property within these
  three districts can be expressed as 80
  mills, or as 8 dollars per 100 of
  assessed valuation, or as 80 per 1,000 of
  assessed valuation.

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Determining a Propertys Taxable Value

• A propertys tax liability is determined by
  applying the combined tax rate to the propertys
  taxable value.
• A propertys taxable value assessed value
  exemptions
• The first step in determining a propertys
  taxable value is to estimate its assessed value.
  Depending on the state, property assessment is
  done by county assessors or state assessors.
• Each state has its own assessment procedures for
  estimating the assessed value of property.
• In most states procedures base assessed value on
  market value estimated from current sales
  information. Assessed value may be 100 of
  market value, or some fraction of market value
  (e.g., 30, 50, 80, or some other percentage of
  market value).
• The assessment procedures of some states use a
  variation of the cost approach in which the
  replacement value of the improvements, less an
  allowance for depreciation, is added to the
  market value of the land.

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Determining a Propertys Taxable Value (Cont.)

• After a propertys assessed value is determined,
  the property owner can apply for exemptions to
  which he/she or the property may be entitled.
• Many states, including California, allow
  homeowners to exempt a certain amount from the
  assessed value of the house. The home must be
  the principal residence of the homeowner. In
  California, the homeowners exemption is 7,000
  of the assessed value.
• California also allows veterans to exempt 4,000
  from the homes assessed value. A person cannot
  claim both a homeowner's and a veterans
  exemption.
• There is also an exemption of 100,000 for
  disabled vets.

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Property Tax In California

• The above procedures for determining property
  taxes are modified in California because of
  strict limitations on the amount of property tax.
• Proposition 13 passed in 1978 imposed strict
  limits on the amount of property taxes that can
  be levied in California.
• Under Prop 13, real estate taxes cannot exceed
  one percent of the market value of property,
  although up to one percent can be added to pay
  for bonded indebtedness approved by voters.
• Moreover, property taxes cannot increase more
  than 2 percent a year.

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Special Assessments

• Special assessments are assessed on property that
  benefits from public improvements. They are not
  levied on an ad valorem basis, but as flat amount
  or a pro rata share of the cost, with the
  allocation proportional to the benefit received.
• Special assessments, like property taxes, are
  priority liens.
• Mello-Roos These are a form of special
  assessment used to pay off bonds issued to
  finance infrastructure construction in new
  developments in Calif.

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Other Property Tax Matters

• Tax lien property taxes due are a lien on real
  property they have priority over other liens,
  like 1st mortgage liens
• Unpaid property taxes
• Assessment appeal
• Property tax variations

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Federal Income Tax

• The discussion of federal income taxes in Chapter
  15 is limited to the taxation ones personal
  residence.

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Capital Gains

• To calculate the gain you must take the sale
  price and subtract the selling expenses then
  subtract the basis to determine the gain.
• The basis represents the homeowners investment
  in the house. It is the portion of property
  value not subject to tax.
• Basis is the price originally paid for the home
  plus any fees paid for closing and improvements
  made to the property.

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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 and closing costs are 8,000
Amount realized 117,000
Amount realized 117,000
Less basis -109,000 Equals
gain 8,000
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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

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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
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Key Terms

• Adjusted sales price
• Ad valorem taxes
• Assessed value
• Basis

• Installment sale
• Documentary tax
• Mill rate
• Tax certificate
• Tax lien