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Chapter 15 Taxes and Assessments

Chapter 15 Taxes and Assessments. Review Gov’t Limitation of Private Ownership of Real Estate. Taxation (Ad valorem and Income) Escheat Eminent domain Police power. I. Ad Valorem Taxes. Administering Property Taxes First step, identify all properties and estimate their values

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Chapter 15 Taxes and Assessments

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  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

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