Property Tax Defined
Property tax is a tax administered by local government districts.
Tax rates vary from county to county and are based on a predetermined percentage of an annually assessed value of each individual property. Property taxes are paid in biannual installments.
Paying Property Taxes On Your Newly Purchased Home
Paying your first year of property taxes can be tricky, depending on when you close escrow on your new home. If your property is in escrow, and the sellers have just paid property taxes, then your agent should request proof of payment. Because it can take up to six weeks for a property tax payment to post, the preliminary title report may show that property taxes are still due. Proof of property tax payment by the seller will allow escrow to close successfully without a potential tax hold.
If you purchased your property between January and October, your property tax bill may be forwarded to the seller’s new address. If you do not receive your property tax bill by the middle of October, contact your County Tax Collector and request that a duplicate tax bill be sent to you. You are still obligated to pay your first property tax installment by the November 1st due date, even if you have not received a tax bill from the county.
If you close escrow near December 10th, and the seller has not yet paid property taxes, then the seller will need to make a check payable to the Tax Collector and forward it to the escrow holder. The escrow holder will see that the title company forwards it to the County. If the check does not clear by the escrow close date, then a hold may be required.
What Is an Impound Account?
An impound account is a convenient way for borrowers to ensure that their property tax and insurance payments are paid in a timely manner. Your lender can set up an impound account which will allow them to collect property tax and hazard insurance payments from you on a monthly basis. The impound payment is collected with your monthly mortgage principal and interest payment and is calculated by taking your yearly tax and annual insurance payment and amortizing it over 12 months, along with a mandatory pad of at least two additional months worth of payments for each. The lender will pay the County Tax Collector and the insurance company directly by drawing the property tax and the insurance premium from the account when the property tax installments are due (November and February) and when the insurance premium is due.
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HOME BUYER'S GUIDE TO SUPPLEMENTAL PROPERTY TAXES
Supplemental Property Tax Defined
The supplemental real property tax law came into effect in 1983 and is part of an ambitious drive to aid California’s
public school system. If you plan on purchasing or building a new home, this law will affect you. Supplemental
property tax is a one-time tax which dates from the time you take ownership of your property or complete construction
until the end of the tax year on June 30.
How Will The Amount of My Bill Be Determined?
There is a formula used to determine your tax bill. Supplemental property tax is based on the difference in assessed
value of a home when purchased by the prior owner and the newly assessed value when purchased by you. If you
are building a home, the supplemental property tax is based on the difference in value of the land before a home
was constructed and the new property value after a home is built. The total supplemental assessment will be prorated,
based on the number of months remaining until the end of the tax year, June 30.
Will My Supplemental Taxes Be Prorated In Escrow?
No. Because supplemental tax is a one-time tax and is in effect from the actual date you take ownership of property,
it will be billed to you by your County Controller/Tax Collector.
When and How Will I Be Billed?
You will be advised of your supplemental assessment amount when your property is appraised during the lending
process. You will thenhave an opportunity to discuss your valuation, apply for a Homeowner’s Exemption and possibly
file an Assessment Appeal. Your county willthen calculate your supplemental tax and mail you a bill. This can happen anywhere from 3 weeks to 6 months after close of escrow. A lien is put on your property for the supplemental taxes,
so be sure to pay your taxes by the date noted on your supplemental tax bill.
Can I Pay My Supplemental Tax Bill In Installments?
All supplemental taxes on the secured roll are payable in two equal installments. The taxes are due on the date the bill is mailed and are delinquent on specified dates, depending on the month the bill is mailed, as follows:
1) If the bill is mailed within the months of July through October, the first installment will become
delinquent on December 10 of the same year. The second installment will become delinquent on April
10 of the next year.
2) If the bill is mailed within the months of November through June, the first installment will become
delinquent on the last day of the month following the month in which the bill is mailed. The second
installment will become delinquent on the last day of the fourth calendar month following the date
the first installment is delinquent.
Will My Supplemental Tax Be Prorated?
The supplemental tax becomes effective on the first day of the month following the month in which the change
of ownership or completion of new construction actually occurred. The table of proration factors shown in the
chart below is used to compute the supplemental assessment on the current tax roll.
Effective Date Proration Factor
August 1.......0.92
September 10.83
October 10.75
November 10.67
December 10.58
January 10.50
Effective Date Proration Factor
February 10.42
March 10.33
April 10.25
May 10.17
June 10.08
July 10
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DOCUMENTARY TRANSFER TAXES
Documentary transfer taxes are taxes that counties, cities or both may charge on documents that grant, assign, transfer or convey real property when the consideration or value, excluding the value of any lein or encumbrance remaining at the time of sale, exceeds $100. Some cities have, by ordinance, imposed a documentary transfer tax in addition to the county documentary transfer tax.
The authorized transfer tax rate in Los Angeles County is $1.10 for each $1,000 of the consideration or value of the property transferred, exclusive of the value of any lien or encumbrance remaining at the time of sale. The documentary transfer tax may vary from city to city. The following list will help you determine how much your documentary transfer taxes will be. Keep in mind that even if your city does not appear on the list you will still pay the $1.10 per $1,000 for the Los Angeles County documentary transfer tax.
Cities That Charge An Additional
Documentary Transfer Tax
Culver City ................................$4.50 per $1,000
Los Angeles ..............................$4.50 per $1,000
Pomona ....................................$2.20 per $1,000
Redondo Beach .........................$2.20 per $1,000
Santa Monica ............................$3.00 per $1,000
Many homebuyers are not sure if their property is in an incorporated city or if their property is
part of a neighborhood within the City of Los Angeles. To help with this, the adjacent information
is a list of neighborhoods that are within the City of Los Angeles and subject to the City’s
documentary transfer taxes.
Communities Within Los Angeles City Jurisdiction
Arleta, Arroyo Seco, Atwater Village, Baldwin Hills, Bel-Air, Beverlywood, Boyle Heights, Brentwood, Canoga Park,
Century City, Chatsworth, Cheviot Hills, Downtown Los Angeles, Eagle Rock, Echo Park, El Sereno, Elysian Valley,
Encino, Glassell Park, Granada Hills, Hancock Park, Highland Park, Hollywood, Holmby Hills, Koreatown, Leimert Park
Lincoln Heights, Los Feliz, Marina del Rey, Mar Vista, Mission Hills, Montecito Heights, Mt. Washington, North Hills,
North Hollywood, Northridge, Olive View, Pacific Palisades, Pacoima, Palms, Panorama City, Pico-Union, Playa del Rey,
Porter Ranch, Rancho Park, Reseda, San Pedro, Sawtelle, Sepulveda, Sherman Oaks, Silver Lake, Studio City, Sunland
Sunset Junction, Sun Valley, Sylmar, Tarzana, Toluca Lake, Tujunga, Universal City, Van Nuys, Venice, Watts,
West Adams, West Alameda, Westchester, West Hills, Westwood, Wilmington, Winnetka, Woodland Hills
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WHAT IS A MELLO-ROOS DISTRICT?
A Mello-Roos District is an area, often newly developing, within a Community Facilities District that has chosen to finance things like streets, water, sewage and drainage, electricity, infrastructure, schools, parks, police protection, and certain public improvements and services through bond sales. Residents in a Mello-Roos District pay a special tax to cover the principal and interest on the bonds.
Are the assessments governed by Proposition 13’s tax limits?
No. Proposition 13, passed in 1978, severely restricts local government from financing public capital facilities and services by increasing real property taxes. The Mello-Roos Community Facility Act of 1982 provides local government with an alternative financing tool. The Proposition 13 tax limits are on the value of the real property, while Mello-Roos taxes are equally applied to all properties.
How long does the tax stay in effect?
The tax stays in effect as long as it is needed to pay for necessary services, or until the principal, interest, and tax collection costs on the bonds are paid off, or 40 years, whichever comes first.
What are my Mello-Roos taxes paying for?
Mello-Roos taxes are most likely used for facilities and services relating to new growth and ongoing community needs, such as police protection, fire protection ambulance and paramedic services, recreation program services, library services, operating and maintaining parks, parkways and open spaces, museums, cultural facilities, flood and storm protection, and services for the removal of any threatening hazardous substance. Mello-Roos taxes may also be used for property with an estimated useful life of five years or longer, including parks, recreation facilities, parkway facilities, open-space facilities, elementary and secondary school sites and structures, libraries, child care facilities, natural gas pipeline facilities, telephone lines, facilities to transmit and distribute electrical energy, and cable television.
How is the tax calculated?
Mello-Roos taxes are typically based on development density, construction square footage, or flat acreage. However, assessment methods may vary depending on local agency procedures.
How much will the Mello–Roos payment be?
The amount may vary from year to year but may not exceed the maximum amount specified in the public report when the district was created. The Resolution of Formation will specify how taxes are assessed in your community and will give you enough information so that you can estimate the maximum amount you will have to pay.
How does the special tax appear on the real property records?
The special tax is a lien on your property, essentially like a regular tax lien.
It is recorded as a “Notice of Special Tax Lien” and secures each portion of the special tax.
When do I pay these taxes?
Your Mello–Roos tax will typically be collected with your general property tax bill.
What happens if a tax payment is late?
Because the Mello-Roos tax is usually collected with your general property tax bill, the Facilities District that obtained the lien may withdraw the assessment from the tax roll and begin foreclosure proceedings. Mello–Roos taxes are subject to the same penalties that apply to regular property taxes.
How are Mello-Roos taxes affected when the property is sold?
Since Mello-Roos tax is assessed against the land and is not based upon the value of the property, the tax rate stays the same and cannot exceed the original maximum amount stated in the Resolution of Formation. As Mello-Roos is a lien against the property, delinquent accounts must first be paid before a sale can close.
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CAPITAL GAINS
What are Capital Gains? We hear people talk about them all the time, but do we really know?
Almost everything you own and use for personal purposes, pleasure or investment is a capital asset. Your main home or investment property is no exception. When you sell a capital asset, such as your home, the difference between the amount you sell it for and your basis, which is usually what you paid for it, is capital gains or capital loss. While you must report all capital gains, you may deduct only your capital losses on investment property, not personal property.
What are short-term vs. long-term capital gains and losses?
Capital gains and losses are classified as long-term or short-term, depending on how long you hold the property before you sell it. If you hold it more than one year, your capital gains or loss is long-term. If you hold it one year or less, your capital gains or loss is short-term.
What is the basis and how is it determined?
You need to know your basis in your home to calculate any gain or loss when you sell it. Your basis is determined by how you acquired your home. If you purchased or built it, your basis is your initial cost. If you acquired it in some other way (inheritance, gift, etc), you must know its adjusted basis to the donor just before it was given to you. You also must know its fair market value (FMV) at the time title was transferred. For more information, log onto www.irs.gov and search for publication 551 (Basis of Assets).
What are the current capital gains rates?
The maximum tax rate on net capital gain (i.e., net long-term capital gain reduced by any net short-term capital loss) is now 15%. Gains that would otherwise be taxed at a regular rate of 10% or 15% are now 5% for property sold or otherwise disposed of after May 5, 2003 (and installment sale payments received after that date.) The reduced rate applies for both the regular tax and the alternative minimum tax. The higher rates that apply to un-recaptured section 1250 gain, collectibles gain, and section 1202 gain have not changed.
If I make a profit from selling my home, do I get to keep any of it tax-free?
As a single homeowner, you can exclude up to $250,000 of capital gains. If you are married filing separately, each of you can exclude up to $250,00. If you are married filing jointly, together you can exclude up to $500,000 of capital gains.
Is this a one-time exclusion?
The exclusion is allowed each time you sell or exchange your principal residence, as often as every two years. And you are not required to reinvest your proceeds in a new residence to claim the exclusion.
What is the ownership and usage criteria for claiming the exclusion?
To be eligible, you must have owned and lived in your home as your primary residence for a combined period of at least two of the last five years prior to selling or exchanging your principle residence.
What is real estate depreciation recapture?
Depreciation is the decrease in the value of property over the time the property is used. Depreciation recapture is when a property used for business purposes is sold at a gain; if accelerated depreciation has been claimed, you may be required to pay tax at ordinary income rates to the extent of the excess accelerated depreciation.
We own a rental property. If we live in it as our main home for two years,
can we sell it and not pay capital gains tax?
You may be able to exclude your allowed amount of capital gains from the sale of your main home that you have also used for business or rental property if you meet the ownership and use criteria outlined in the above paragraph. However, if you took depreciation on your home used for business or rental property, you cannot exclude the part of your gain equal to the depreciation taken or allowable for the periods after May 1997. If you can prove that the depreciation taken was less than the amount allowable, the amount you cannot exclude is the lesser of the two figures. Refer to publication 523 on www.irs.gov for more information.
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10 Most Overlooked Real Estate Tax Deductions
Have you ever forgotten to claim a tax deduction until after you sent your tax returns to the IRS? Fortunately, tax returns can be amended up to three years from the date they were due. But it’s better to claim all the deductions when the tax return is filed because amended tax returns often trigger a tax audit before the IRS will issue a refund check. This is especially true if you bought, sold or refinanced your home–you may have forgotten to claim some big tax deductions. Here are the most often forgotten real estate tax deductions:
1. Deduct Principal Residence Acquisition Mortgage Fee If You Bought A Home Last Year.
If you bought your principal residence last year and if you paid the mortgage lender a loan fee, usually called “points,” (each point equals 1 percent of the amount borrowed), that “home acquisition mortgage loan fee” is tax deductible as itemized interest on Schedule A of your tax returns.
But don’t count on your mortgage lender to include this loan fee on your annual IRS Form 1098 sent to you reporting annual mortgage interest paid. Some lenders only report your monthly interest payments, neglecting to remind you of the deductible loan points you paid to obtain the home acquisition mortgage. Your best proof of loan fee payment to obtain the home mortgage is your closing statement received when the acquisition mortgage was recorded.
2. Remember To Deduct Home Mortgage Refinance Loan Fees Over The Life Of The Home Loan.
If you refinanced your home loan or obtained another type of real estate loan, any loan fee or points you paid can only be deducted over the life of the mortgage, such as 15 or 30 years.
To illustrate, suppose you paid a $2,000 loan fee to refinance your 30-year home mortgage. Rather than deduct the full $2,000, as you could do when obtaining a home acquisition mortgage, because it is a refinanced home loan all you can deduct is $66.67 annually for the next 30 years.
For this reason, when refinancing a home mortgage, many borrowers prefer to get a so-called “no cost” mortgage without any loan fee or points. The general rule is for each loan-fee point paid, the mortgage interest rate should decline by one-eighth percent. To avoid the hassle of remembering to deduct the small loan fee amount each year for 15 or 30 years, many refinancing home loan borrowers prefer to pay a slightly higher loan interest rate. Another reason to avoid paying a loan fee when refinancing is most home loans are paid off in less than 10 years, either due to property sale or a subsequent mortgage refinance.
3. Deduct Undeducted Loan Fees From A Prior Home Loan Refinance.
If you refinanced a previously refinanced home loan, don’t forget to deduct any remaining undeducted loan fee in the tax year of the second refinance. For example, suppose you refinanced your home mortgage last year and had $1,500 undeducted loan fees from a prior refinance. That $1,500 is fully deductible as itemized interest in the tax year of the second refinance.
4. Deduct Any Mortgage Prepayment Penalty You Paid.
Many home loans have prepayment penalties if they are paid off early, usually within the first three to five years. If you paid a prepayment penalty because you sold the home or refinanced, the prepayment penalty qualifies as deductible itemized interest.
5. If You Changed Job Location And Your Residence, Your Moving Costs May Be Deductible.
Whether you are a renter or a homeowner, you may qualify for the moving-cost deduction if you changed both your job site and your residence but were not reimbursed for household moving costs. This can be a big tax deduction, especially if you made a major cross-country move to take a new job. Use IRS Form 3903 to calculate and claim this deduction. To qualify, the distance from your old residence to your new job location must be at least 50 miles further from your old home than was your old job location. For example, suppose your old home was three miles from your old job location. In this example, if your new job site is at least 53 miles (3 plus 50) from your old home, you can qualify.
After you pass the distance test, the second moving-cost deduction test requires you to be employed at least 39 weeks during the 52 weeks in the vicinity of your new job location. You need not work for the same employer. Either spouse can qualify. If you are self-employed, however, you must work at least 78 weeks during the next 24 months in the vicinity of your new worksite.
6. Remember To Deduct Any Casualty Loss.
If you suffered a “sudden, unusual or unexpected” loss, such as fire, flood, hurricane, tornado, earthquake, mudslide, theft, accident, water damage, riot, embezzlement, vandalism, snow, rain and ice storm, but were not paid by insurance or other reimbursement, you may be able to claim a casualty loss tax deduction. However, slow losses are not deductible. Non-deductible examples include termite damage, dry rot, dry well, rust, corrosion, plant loss, moth damage, Dutch elm disease, erosion and mold. To qualify, the casualty loss deduction must exceed 10 percent of your adjusted gross income, plus a $100 “floor” per casualty event. Use IRS Form 4684 to calculate your deducible amount. But be aware you will need proof of loss, such as your uninsured repair cost. Replacement estimates alone usually are not enough if you didn’t repair or replace.
7. Deduct Prorated Property Tax In Year Of Home Sale Or Purchase.
An easily forgotten deduction in the year of a home sale is your share of the prorated property taxes. This deduction is usually paid to the local tax collector as part of the sale closing procedure so you might not have a cancelled check or other proof of payment. Your closing settlement statement should show your prorated property tax share, based on the number of days you owned your home during the tax year.
8. Deduct Prorated Mortgage Interest In The Year Of Home Sale Or Purchase.
If you bought your home last year and either assumed or purchased “subject to” its existing mortgage, you are entitled to deduct your prorated interest share for the month the sale closed. Again, the buyer and seller’s shares are usually calculated on their closing statements, even if the other party made the actual interest payment to the mortgage lender.
9. Deduct Prepaid Property Taxes And Mortgage Interest.
Millions of U.S. homeowners prepay their property taxes and mortgage payments each December even though these payments are not due until the next year. The reason is these payments are deductible in the tax year of actual payment. Not all local property tax collectors allow early payments, but many do. If you prepaid your January mortgage payment in late December, be sure your lender received the payment and included it on your IRS Form 1098.
10. If Your Home Is On Leased Land You May Be Entitled To Deduct Ground Rent.
If your home is one of the millions located on leased land, and if you have an option to buy that land, your ground rent payments may be deductible as itemized interest. Internal Revenue Code 163(c) permits homeowners living on leased land to deduct their ground rent payments if (a) the ground lease is for at least 15 years, including renewal periods, (b) the land lease is freely assignable to the buyer of your residence, (c) the land owner’s interest is primarily a security interest (like a mortgage), and (d) you have a current or future option to buy the land under your home.
If your situation does not meet all four of these tests, your ground rent payments are not deductible. For example, if you rent a “pad” or “lot” in a mobile home park, your monthly rent paid to the park owner is not deductible unless you have at least a 15-year lease with a purchase option
Additional Homeowner Deductions: Although rarely forgotten, additional homeowner deductions include the property taxes and mortgage interest. However, payments into your escrow impound account with your mortgage lender do not become deductible until the loan servicer actually remits the money to the local tax collector. Most lenders include the deductible property tax and mortgage interest amounts on the borrower’s annual IRS Form 1098. Of course, if you pay your property taxes directly without an escrow account, then your lender won’t include that amount on your Form 1098.If you were among the more than 12 million home buyers and sellers last year, you probably paid additional closing costs such as transfer tax, recording fees, escrow, title, or attorney fees, and other non-deductible expenses. Home buyers should add these nondeductible expenses they paid to their purchase price cost basis for the house or condo. Residence sellers should subtract these costs paid as sales expenses from their home’s gross sales price. For full details on these and other homeowner and real estate investor tax benefits, please consult your tax advisor.
By Robert J. Bruss, ©2005 Inman News. Reprinted with permission.