Foreclosure

Report
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Objectives
Understand the difference between general and specific liens
Describe Ad Valorem taxes and the governmental bodies that impose them
Describe special assessment taxes and why they are in place
Identify the two components of depreciation and the basis of depreciation
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Understand installment sales and how they are determined
Identify capital gain on home sales and the types of capital gain
Comprehend various types of foreclosures
Understand how to delay a foreclosure
Identify the obligations required of a buyer in a foreclosure
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1-800-328-2008
Objectives
Understand the difference between general and specific liens
Describe Ad Valorem taxes and the governmental bodies that impose them
Describe special assessment taxes and why they are in place
Identify the two components of depreciation and the basis of depreciation
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Understand installment sales and how they are determined
Identify capital gain on home sales and the types of capital gain
Comprehend various types of foreclosures
Understand how to delay a foreclosure
Identify the obligations required of a buyer in a foreclosure
www.McKissock.com
1-800-328-2008
Objectives
Understand the difference between general and specific liens
Describe Ad Valorem taxes and the governmental bodies that impose them
Describe special assessment taxes and why they are in place
Identify the two components of depreciation and the basis of depreciation
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Understand installment sales and how they are determined
Identify capital gain on home sales and the types of capital gain
Comprehend various types of foreclosures
Understand how to delay a foreclosure
Identify the obligations required of a buyer in a foreclosure
www.McKissock.com
1-800-328-2008
Objectives
Understand the difference between general and specific liens
Describe Ad Valorem taxes and the governmental bodies that impose them
Describe special assessment taxes and why they are in place
Identify the two components of depreciation and the basis of depreciation
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Understand installment sales and how they are determined
Identify capital gain on home sales and the types of capital gain
Comprehend various types of foreclosures
Understand how to delay a foreclosure
Identify the obligations required of a buyer in a foreclosure
www.McKissock.com
1-800-328-2008
Objectives
Understand the difference between general and specific liens
Describe Ad Valorem taxes and the governmental bodies that impose them
Describe special assessment taxes and why they are in place
Identify the two components of depreciation and the basis of depreciation
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Understand installment sales and how they are determined
Identify capital gain on home sales and the types of capital gain
Comprehend various types of foreclosures
Understand how to delay a foreclosure
Identify the obligations required of a buyer in a foreclosure
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Feedback Question - 1.
We will be discussing the 3 types of
liens; General, Specific and Ad
Valorem.
A
TRUE
B
FALSE
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Feedback Question - 1.
We will be discussing the 3 types of
liens; General, Specific and Ad
Valorem.
A
TRUE
B
FALSE
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1-800-328-2008
Objectives
Understand the difference between general and specific liens
Describe Ad Valorem taxes and the governmental bodies that impose them
Describe special assessment taxes and why they are in place
Identify the two components of depreciation and the basis of depreciation
www.Mckissock.com
Understand installment sales and how they are determined
Identify capital gain on home sales and the types of capital gain
Comprehend various types of foreclosures
Understand how to delay a foreclosure
Identify the obligations required of a buyer in a foreclosure
www.McKissock.com
1-800-328-2008
Objectives
Understand the difference between general and specific liens
Describe Ad Valorem taxes and the governmental bodies that impose them
Describe special assessment taxes and why they are in place
Identify the two components of depreciation and the basis of depreciation
www.Mckissock.com
Understand installment sales and how they are determined
Identify capital gain on home sales and the types of capital gain
Comprehend various types of foreclosures
Understand how to delay a foreclosure
Identify the obligations required of a buyer in a foreclosure
www.McKissock.com
1-800-328-2008
Objectives
Understand the difference between general and specific liens
Describe Ad Valorem taxes and the governmental bodies that impose them
Describe special assessment taxes and why they are in place
Identify the two components of depreciation and the basis of depreciation
www.Mckissock.com
Understand installment sales and how they are determined
Identify capital gain on home sales and the types of capital gain
Comprehend various types of foreclosures
Understand how to delay a foreclosure
Identify the obligations required of a buyer in a foreclosure
www.McKissock.com
1-800-328-2008
Objectives
Understand the difference between general and specific liens
Describe Ad Valorem taxes and the governmental bodies that impose them
Describe special assessment taxes and why they are in place
Identify the two components of depreciation and the basis of depreciation
www.Mckissock.com
Understand installment sales and how they are determined
Identify capital gain on home sales and the types of capital gain
Comprehend various types of foreclosures
Understand how to delay a foreclosure
Identify the obligations required of a buyer in a foreclosure
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1-800-328-2008
Section 1
LIENS
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Liens
A lien is a claim against property, made in order to secure payment of a debt.
 The lien makes the property collateral against monies or services owed to
another person or entity.
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 Collateral is an asset that has been pledged by the recipient of a loan as security
on the value of the loan. If the recipient of the loan is unable to repay the loan,
the lender will look to the collateral as a source for payment on the debt.
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Liens
Liens are of two kinds: general and specific.
 In addition, there are voluntary and involuntary liens.
 Voluntary liens are imposed by
a contract between the creditor and the debtor
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(e.g., when a lender holds a mortgage on a property, it has a lien against the
home).
 Involuntary liens are imposed by law, such as when a lien is placed on a property
for outstanding taxes and other unpaid debts.
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Liens
An encumbrance is a claim against, limitation on, or liability against real estate.
 Encumbrances include liens, deed restrictions, easements, encroachments, and
licenses.
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 An encumbrance can restrict the owner's ability to transfer title to the property, or
it can lessen the property’s value. It represents some right or claim of another to a
portion of the property or to the use of the property.
 Liens may be voluntary or involuntary, statutory or equitable, general or specific.
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Poll Question – 2.
A/an ______ is a claim made against a
property by someone in order to
secure payment of a debt.
A
Lien
B
Tax
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C
Back Payment
D
Encumbrance
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Poll Question – 2.
A/an ______ is a claim made against a
property by someone in order to
secure payment of a debt.
A
Lien
B
Tax
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C
Back Payment
D
Encumbrance
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Looking at Tax Liens
On January 1, when the assessment roll takes effect for the next tax year, a lien is
placed on all assessed real property in the amount of the tax due.
 Taxes on personal property also may be liens on secured real property if they are
listed with or cross-referenced to real property on the secured assessment roll.
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 The assessor determines whether the real property is sufficient security for the
personal property tax. At the taxpayer’s request, real property owned by the
taxpayer elsewhere in the county also may secure the personal property tax lien.
 Before the lien date, the assessor issues and records a certificate to that effect.
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Looking at Tax Liens
The real and personal property are cross-referenced in the tax rolls.
The property tax lien takes priority over all others, with some exceptions.
The exceptions are for the following:
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 a judgment lien creditor who acquired a right, title, or interest, prior to the
recording of the property tax lien;
 holders of a security interest or mechanic’s lien;
 a person or entity who bought the property or took title to it without knowledge
of the lien
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Liens
Liens are of two
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kinds
General Liens
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Specific Liens
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General Liens
A judgment lien is a court ordered lien that is placed against
the home or property when the homeowner simply fails to pay
a debt.
When the homeowner has a judgment lien against his or her
Estate & Inheritance home and wants to sell it, the judgment lien has to be paid in
Tax Liens
full before the home or property can be sold.
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Judgment liens can be placed against the property for a variety
Corporation
of reasons such as unpaid credit card bills, utility bills,
Franchise Tax Liens department store bills, landscaping or home improvement bills,
and just about any bill that the homeowner has failed to pay in
a reasonable amount of time.
IRS Tax Liens
Any bill that can cause an individual to end up in court can
result in a judgment lien.
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Feedback Question – 3.
Failing to pay property taxes would
invoke and Voluntary Lien against the
property.
A
TRUE
B
FALSE
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Feedback Question – 3.
Failing to pay property taxes would
invoke and Voluntary Lien against the
property.
A
TRUE
B
FALSE
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General Liens
Judgement Liens
Estate tax liens help protect the government's interest in
collecting federal estate tax liabilities.
A general estate tax lien arises when a decedent's estate fails
to pay its estate tax liability. The general estate tax lien
attaches to all of the property that is included in the
decedent'swww.Mckissock.com
gross estate. The decedent's gross estate includes
all property owned at death, plus certain other assets over
which the decedent had sufficient control. The lien does not
Corporation
Franchise Tax Liens attach to property that is outside of the decedent's gross
estate or property which (as part of the gross estate) is used to
pay court-approved estate expenses.
IRS Tax Liens
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The general estate tax lien is enforceable for a period of ten
years following the decedent's death.
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General Liens
State governments generally levy a corporation franchise tax on
corporations
as a condition of allowing them to do business in the state.
Judgement
Liens
Such a tax is a general statutory involuntary lien on all real and personal
property owned by the corporation.
Estate & Inheritance
Tax Liens
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IRS Tax Liens
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General Liens
In the United States, a federal tax lien may arise in connection with any
kind
of federal tax, including but not limited to income tax, gift tax, or
Judgement
Liens
estate tax.
Estate & Inheritance Internal Revenue Code section 6322 provides:
Tax Liens
Sec. 6322.www.Mckissock.com
Period of Lien.
“Unless another date is specifically fixed by law, the lien imposed
Corporation
Franchise Tax Liens by section 6321 shall arise at the time the assessment is made
and shall continue until the liability for the amount so assessed
(or a judgment against the taxpayer arising out of such liability)
is satisfied or becomes unenforceable by reason of lapse of
time.”
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Feedback Question – 4.
Which of the following is a general
lien?
A
Property tax lien
B
Real estate tax lien
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C
Judgment lien
D
Mortgage lien
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Feedback Question – 4.
Which of the following is a general
lien?
A
Property tax lien
B
Real estate tax lien
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C
Judgment lien
D
Mortgage lien
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Specific Liens
Some states are “tax deed only” states, which gives their
governments access to immediate funds to function properly and
perform their normal operations. If an owner does not pay property
taxes, the property becomes tax defaulted and the owner has five
Real Estate Tax Liens years to redeem it. The owner of the property has two choices:
redeem the property and pay a fortune in taxes and interest, or not
Mortgage Liens redeem the property and let the government sell it.
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Mechanic’s Liens
Utility Liens
Bail Bond Liens
Unlike tax deeds, tax lien certificates let the investor earn a high
rate of interest on the delinquent property taxes in addition to
collecting the property if the owner fails to redeem. Tax lien
certificates are a low-risk, high-return alternative to the constantly
changing economy. Buying tax lien certificates is probably the bestkept secret in investing. It is safe and simple to do.
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Specific Liens
Unlike personal debts, tax liens on real estate occur when property
Property Tax Lien owners become responsible for payment even if the tax obligation
was incurred by a prior owner. Depending on the law of the state or
jurisdiction, the owner of the property may also be personally liable
for payment of the taxes.
Payment of a tax lien may occur through various methods:
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 Payment may be made directly by the property owner or, in
Mechanic’s Liens
many cases, indirectly by the mortgage holder using an escrow
account.
Utility Liens
 If a property is sold by the owner prior to tax foreclosure by the
government body, the tax lien (which is generally discovered as
Bail Bond Liens
part of a title search) is usually paid from the sale proceeds as
part of closing costs.
Mortgage Liens
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Specific Liens
Property Tax Lien
Real Estate Tax Liens A mortgage lien is a legal claim against a mortgaged property that
must be paid or assumed when the property is sold. The person
who holds the lien against the property can claim the property if
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the loan defaults.
The mortgage lien typically belongs to the
lender in order to secure the mortgage loan.
Mechanic’s Liens
Utility Liens
Bail Bond Liens
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Specific Liens
Property Tax Lien A mechanic's lien is a security interest in the title to property for
the benefit of those who have supplied labor or materials that
improve the property. The lien exists for both real property and
Real Estate Tax Liens
personal property.
Mortgage Liens
Utility Liens
Bail Bond Liens
In the realm of
real property, it is called by various names including,
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generically, construction lien. It is also called a materialman's lien or
supplier's lien when referring to those supplying materials, a
laborer's lien when referring to those supplying labor, and a design
professional's lien when referring to architects or designers who
contribute to a work of improvement. In the realm of personal
property, it is also called an artisan's lien. Mechanic’s liens on
property in the United States date from the 1700s.
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Specific Liens
Property Tax Lien
Real Estate Tax Liens
Mortgage Liens
Mechanic’s Liens
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Municipalities often have the right to impose a specific, equitable,
involuntary lien on the property of an owner who refuses to pay
bills for municipal utility services.
Bail Bond Liens
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Specific Liens
Property Tax Lien
Real Estate Tax Liens
A bail bond lien happens when a family member needs to be bailed
Mortgage Liens out of jail and a relative puts up his or her home for collateral. The
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bail company will place a bail bond against the relative’s property,
which works as an insurance policy for the court. If the individual
Mechanic’s Liens
does not show up for the court date, the bail is paid to the court
through the bail bond company.
Utility Liens
In most cases, bail bond liens are secured with a deed of trust,
allowing the bail bond company to foreclose the property if the
bond is not repaid.
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Feedback Question – 5.
A ___________is a security interest in
the title to property for the benefit of
those who have supplied labor or
materials that improve the property.
A
Mechanic's lien
B
Judgment lien
C
Mortgage lien
D
Property tax lien
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1-800-328-2008
Feedback Question – 5.
A ___________is a security interest in
the title to property for the benefit of
those who have supplied labor or
materials that improve the property.
A
Mechanic's lien
B
Judgment lien
C
Mortgage lien
D
Property tax lien
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Case Study: Mechanic's Lien - RTBH, Inc. v. Simon
Property Group
Dick's Sporting Goods, Inc. entered into a lease with Simon Property
Group for a property that Simon owned at a mall. Dick's planned to
build a new store on the property, which would required the
deconstruction of the existing units. Simon agreed to pledge to finish
the construction of the building if Dick's failed to complete it. Dick's
used S.C. Nestel, Inc. as the general contractor for the project.
McAndrews was then subcontracted
by Nestel to do the window and
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glass work. Throughout the construction process, a representative from
McAndrews was in contact with representatives from Dicks' and Nestel,
but not with anyone from Simon. The store was eventually completed
without the need for Simon to intervene. Nestel refused to pay
McAndrews for the work and, instead, filed a complaint for damages
against them. McAndrews filed a counterclaim against both Nestel and
Simon stating that there was a valid mechanic's lien on the property.
Simon made a motion for a partial summary judgment. They claimed
there was no mechanic's lien on their interest of the property.
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Case Study: Mechanic's Lien - RTBH, Inc. v. Simon
Property Group
What is the issue in this case?
A
B
Whether or not McAndrews is entitled
to payment for their services
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Whether or not Simon is responsible
for the improvements provided by
McAndrews
C
How much McAndrews is entitled to receive
D
None of the answers shown
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Case Study: Mechanic's Lien - RTBH, Inc. v. Simon
Property Group
What is the issue in this case?
A
B
Whether or not McAndrews is entitled
to payment for their services
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Whether or not Simon is responsible
for the improvements provided by
McAndrews
C
How much McAndrews is entitled to receive
D
None of the answers shown
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Case Study: Mechanic's Lien - RTBH, Inc. v. Simon
Property Group
McAndrews wanted to be paid for their services. However, Simon claimed they were
targeting the wrong people. Simon was not necessarily claiming that McAndrews
was not owed money, only that they were not responsible for it.
How, do you think, the court ruled in this case?
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A
As the owners of the property, Simon Group is
responsible for any lien associated with that
property
B
Simon did not consent to the improvements,
so the lien does not apply to their interest
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Case Study: Mechanic's Lien - RTBH, Inc. v. Simon
Property Group
McAndrews wanted to be paid for their services. However, Simon claimed they were
targeting the wrong people. Simon was not necessarily claiming that McAndrews
was not owed money, only that they were not responsible for it.
How, do you think, the court ruled in this case?
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A
As the owners of the property, Simon Group is
responsible for any lien associated with that
property
B
Simon did not consent to the improvements,
so the lien does not apply to their interest
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The Effects of Liens on Title
 Unlike personal debts, tax liens "run with the land" in that a property owner
becomes responsible for payment even if the tax lien obligation was incurred by a
previous owner.
 Depending on the local state and county law, the new owner of the property may
also become personally liable for any and all payment of the tax lien.
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 So, when a property owner doesn't pay his property taxes, the county government
puts a lien on the property, making it a tax lien property.
 The county government will then look for investors to pay the property owner’s back
taxes owed, so that the local government can continue to run on budget.
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Feedback Question – 6.
The previous owner of the laundromat
failed to pay his municipal property
taxes for 3 years / $3800. The new
owner should pay the tax bill?
A
TRUE
B
FALSE
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Feedback Question – 6.
The previous owner of the laundromat
failed to pay his municipal property
taxes for 3 years / $3800. The new
owner should pay the tax bill?
A
TRUE
B
FALSE
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Priority of Liens
The usual rule as to priority of liens is that they rank in the order of their filing or
recording in the office of the proper officials.
 A mortgage recorded yesterday has precedence over one recorded today, and
both are prior in lien to a mechanic's lien that may be filed tomorrow.
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 As to judgments, there is an exception to this rule; a judgment is not good against
the rights of those claiming under a deed or mortgage actually delivered prior to
the date of docket of the judgment, even though the deed or mortgage has not
been recorded.
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Perfected and Unperfected Liens
Liens may be "perfected" or "unperfected.“
 Perfected liens are those liens for which a creditor has established a priority right
in the encumbered property with respect to third party creditors.
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 Perfection is generally accomplished
by taking steps required by law to give third
party creditors notice of the lien.
 The fact that an item of property is in the hands of the creditor usually
constitutes perfection. Where the property remains in the hands of the debtor,
some further step must be taken, such as recording a notice of the security
interest with the appropriate office.
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Selling Property
If you are planning on selling property that has a lien on it, it is unlikely that the sale
will close unless the debt is taken care of. A buyer will expect liens to be paid to
allow for a transfer of clear title.
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Poll Question – 7.
Liens are ranked in order of their:
A
Importance
B
Filing date
C
Amount
D
Urgency
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Poll Question – 7.
Liens are ranked in order of their:
A
Importance
B
Filing date
C
Amount
D
Urgency
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Purchasing Property
 When purchasing real estate, it is important to make sure there is no lien on the
property that will prevent the securing of a clear title to the property.
 Generally, a bank or other mortgage lender will not provide mortgage financing until
all liens on the property have been removed.
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 A title search will usually indicate whether or not a lien exists and whether the seller
is the legally recognized property owner.
 It should also indicate the exact legal description of the property, as well as
providing details regarding a lien or other encumbrances against the title.
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Transferring Property without Removing Liens
 The law does not require that liens be removed before title to property can be sold
or transferred.
 But the lien will need to be cleared up if the buyer needs financing or wants clear
title.
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 If property is transferred without the lien being paid off, it remains on the property.
 In transfers between relatives, the new owner may be willing to take title to
property that already has liens encumbering it.
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Property Lien Disputes
If there is a property lien dispute, an experienced real estate attorney should be
contacted to help resolve it.
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Feedback Question – 8.
Mr. Trump purchased a property that
had a cloud on the property. A
mechanics lien had been placed at
city hall. 1 day prior to close. His title
insurance __________ cover this as it
was less than 36 hours before close.
A
WOULD
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B
WOULD NOT
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Feedback Question – 8.
Mr. Trump purchased a property that
had a cloud on the property. A
mechanics lien had been placed at
city hall. 1 day prior to close. His title
insurance __________ cover this as it
was less than 36 hours before close.
A
WOULD
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B
WOULD NOT
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How are Real Estate Liens Released/Assigned?
 Obviously, a full payoff of one's debt will lead to the removal of a lien upon
providing evidence to the County Records Office, but suppose you are ready to
sell your home or trade in your vehicle but you've been told you have to obtain a
"Release of Lien" first.
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 Normally, you would go back to the bank or Savings and Loan and ask them to
prepare a release for you.
But, where do you go if the bank or Savings and Loan has failed?
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How are Real Estate Liens Released/Assigned?
The Federal Deposit Insurance Corporation (FDIC), which is best known for insuring
bank depositors to at least $250,000 per insured bank account, may be able to help
by providing you with a Release of Lien on your home, vehicle, boat or other
personal property if:
 The lien holder is a bank or Savings and Loan Institution that failed and has been
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placed in FDIC receivership. Also,
in some cases, if the lien holder is a Subsidiary
of a failed bank or Savings and Loan. If you're not sure, please call the appropriate
DRR Customer Service Center at 972-448-6000 or toll-free at 888-206-4662.
 The loan was paid off before the institution failed.
 The loan was paid off to the FDIC after the institution failed.
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How are Real Estate Liens Released/Assigned?
A request for a Release of Lien must be made in writing and be detailed.
 Mail, email or fax your request to the appropriate DRR Customer Service Center
with the recorded document to be released or to be assigned showing the closed
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institution as the lien holder.
 Also, a proof of payoff must be provided to expedite the completion of your
request and avoid researching the records of the closed institution which will
delay the completion of your request.
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How are Real Estate Liens Released/Assigned?
When an Assignment of Lien is needed to complete a chain of title, you must
obtain an Assignment of Lien from the FDIC. The following documents are needed
to obtain an Assignment of Lien:
 A copy of the Mortgage or Deed of Trust Document that you are requesting to be
assigned. The copy must be readable and clearly show the recording information.
This document can be obtained from the Public Records in the County where the
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property is located or from your title company or title attorney.
 Copies of any subsequent assignments that show the chain of title leading to an
FDIC receivership.
 Proof that the party to whom the assignment is being made is the current holder
of the mortgage. Proof can be in the form of a Note Endorsement, Loan History,
Sales Contract or Indemnification Agreement.
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Feedback Question – 9.
Who should be contacted to settle a
property lien dispute?
A
The FDIC
B
A real estate attorney
C
The Police
D
The County Clerk
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Feedback Question – 9.
Who should be contacted to settle a
property lien dispute?
A
The FDIC
B
A real estate attorney
C
The Police
D
The County Clerk
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Where to Send Your Request
A request for a Release of Lien must be made in writing.
You can mail your request to:
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FDIC, 1910 Pacific Ave, Dallas
TX 75201
Attention: DRR Customer Service
Center/Inwood
OR
It can be faxed to 703-812-1082
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Section 2
REAL ESTATE
TAX LIENS
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General Ad Valorem Tax
An ad valorem tax (Latin for “according to value”) is a tax based on the value of real
estate or personal property.
General
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Ad Valorem Tax
An ad valorem tax is typically imposed at the time of a transaction, as in a sales tax or
value-added tax (VAT), but it may be imposed on an annual basis (real or personal
property tax) or in connection with another significant event (inheritance tax,
surrendering citizenship, or tariffs). These taxes are specific, involuntary, statutory liens.
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General Ad Valorem Tax
Sales Tax
A sales tax is a consumption
tax charged at the point of
purchase for certain goods
and services. The tax is usually
set as a percentage by the
government charging the tax.
General
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Ad Valorem Tax
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General Ad Valorem Tax
Sales Tax
General
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Ad Valorem Tax
Value-Added Tax
A value-added tax (VAT), or goods and
services tax (GST), is a tax on exchanges,
levied on the added value that results
from each exchange. It differs from a sales
tax because a sales tax is levied on the
total value of the exchange.
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General Ad Valorem Tax
Sales Tax
General
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Ad Valorem Tax
Property Tax
Value-Added Tax
A property tax, or millage tax, is an ad valorem tax
that an owner of real estate or other property pays on
the value of the property being taxed. There are three
species or types of property: Land, Improvements to
Land (immovable man-made things), and Personalty
(movable man made things).
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Ad Valorem Importance
 Ad valorem duties are important to those importing goods into the United States,
because the amount of duty owed is often based on the value of the imported
commodity. Ad valorem taxes (mainly real property tax and sales taxes) are a
major source of revenues for state and municipal governments, especially in
jurisdictions that do not employ a personal income tax.
 "Ad valorem" is used frequently to refer to property values by county tax
assessors. In many states, the www.Mckissock.com
central appraisal district sends certified values to
the county tax assessor, who determines the final tax rate to be imposed on the
property. Other states use a state tax commission, which notifies the appropriate
taxing authorities of the assessed value of property within their billing
jurisdiction.
 Ad valorem tax relates to a tax with a rate given as a proportion of the price. For
example, virtually all state and local taxes on restaurant meals and clothing are ad
valorem.
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Feedback Question - 10.
Who benefits the most from ad
valorem taxes?
A
Taxpayers
B
Local government
C
Federal government
D
Businesses
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Feedback Question - 10.
Who benefits the most from ad
valorem taxes?
A
Taxpayers
B
Local government
C
Federal government
D
Businesses
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What Property is Taxed?
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"Real property" for property tax purposes generally includes the land, building,
structures, and all improvements or fixtures annexed to the building or structure. The
definition of real property often excludes business personal property such as tools,
implements, machinery, and equipment attached to or installed as real property for use
in the business.
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What Property is Taxed?
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Taxing authorities may also tax personal property. The items taxed vary by jurisdiction,
but most jurisdictions do not impose property taxes on household goods, inventories,
and intangible personal property such as bonds. Motor vehicles, however, are often
subject to ad valorem taxation.
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Determining the Amount of Ad Valorem Taxes
 Generally, ad valorem taxes are assessed as of
January 1 each year and are computed as a
percentage of the assessed value of the property
being taxed.
 The assessed value of propertywww.Mckissock.com
generally is a fair
percentage of fair market value.
 "Fair market value" is usually defined as the price that a willing buyer would pay
and a willing seller would accept for property, neither being under any compulsion
to buy or to sell. It is also defined as the price at which property would change
hands between a willing buyer and a willing seller when both have reasonable
knowledge of all the facts necessary and neither is required to buy or sell.
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Determining the Amount of Ad Valorem Taxes
Appraisers hired by the taxing authority most often value the property. Most
taxing authorities require periodic inspections of the subject property as part of
the valuation process and establish appraisal criteria to determine fair market
value.
Such criteria include factors analyzing:
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 the cost of the property and subsequent
depreciation;
 comparable market data;
 the use of the property; and
 estimated annual net income generated by a
business property.
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Poll Question – 11.
Which of the following is considered
“real property”?
A
Land
B
Buildings
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C
Structures
D
All of the above
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Poll Question – 11.
Which of the following is considered
“real property”?
A
Land
B
Buildings
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C
Structures
D
All of the above
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Disputing Valuation
Upon notification of assessment, the property owner may dispute the valuation.
Generally, taxpayers may request a hearing at the local level and, if necessary,
appeal the valuation to a higher agency and, ultimately, a tax court.
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Levy of Tax and Classification
 Once a value is determined, the tax is levied, and
the property owner is notified.
 The actual tax rate may vary depending on the
property's classification.
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 Property is often classified according to its use.
 Common classifications include commercial/industrial property, multiple dwelling
property, residential homestead property, agricultural property, and business
property.
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Parties Involved
County
County
Board of
Board www.Mckissock.com
Tax
of
Assessors
Education
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Parties Involved
County
Board
of
Education
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The County Tax Commissioner, an office
established by the Constitution and
elected in all counties except one, is the
official responsible for receiving tax
returns filed by taxpayers or designating
County
the board of tax assessors to receive
Board of
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them; receiving and processing
Tax
application for homestead exemption;
Assessors
serving as agent of the State Revenue
Commissioner for the registration of
motor vehicles; and performing all
functions related to billing, collecting,
accounting for, and disbursing ad
valorem taxes collected in this county.
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Parties Involved
County
Board
of
Education
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The County Board of Tax Assessors,
appointed for fixed terms by the county
governing authority in all counties
except one, is responsible for
determining taxability and also for the
County
appraisal, assessment, and equalization
Board of
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of all assessments within the county. The
Tax
Board of Tax Assessors notifies taxpayers
Assessors
when changes are made to the value of
property, receive and review all appeals
filed, and insure that the appeal process
proceeds properly. In addition, the Board
approves all exemptions claimed by the
taxpayer.
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Parties Involved
County
Board
of
Education
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The County Board of Equalization,
appointed by the Grand Jury, is the body
charged by law with hearing and
adjudicating administrative appeals to
County
property assessments made by the Board
Board of
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of Tax Assessors. (Note: An arbitration
Tax
method of appeal is available to the
Assessors
taxpayer in lieu of an appeal to the Board
of Equalization at the option of the
taxpayer at the time the appeal is filed.)
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Parties Involved
County
Board
of
Education
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The Board of County Commissioners, or
County Governing Authority (or the sole
County
Commissioner in some counties), an
Board of
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elected body, establishes the annual
Tax
budget for county government operations
Assessors
and then levies the mill rate necessary to
fund the portion of the budget to be paid
for by ad valorem tax.
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Parties Involved
County
Board
of
Education
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The County Board of Education, an
elected body, establishes the annual
County
budget for school purposes and then
Board
of
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recommends the mill rate, which, with
Tax
very few exceptions, must be levied for
Assessors
the School Board by the County
Commissioners.
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Parties Involved
County
Board
of
Education
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The State Revenue Commissioner
County
exercises general oversight of the entire
Board of
ad valorem tax process. In addition, the
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Tax
State levies ad valorem tax each year in
Assessors
an amount which cannot exceed onefourth of one mill (.00025).
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Feedback Question – 12.
Who receives tax returns filed by
taxpayers?
A
County Board of Tax Assessors
B
County Board of Equalization
C
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Board of County Commissioners
D
County Tax Commissioner
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Feedback Question – 12.
Who receives tax returns filed by
taxpayers?
A
County Board of Tax Assessors
B
County Board of Equalization
C
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Board of County Commissioners
D
County Tax Commissioner
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Special Assessment (Improvement Taxes)
 Special assessment is the term used in the United States to designate a unique
charge government units can assess against real estate parcels for certain public
projects. This charge is levied in a specific geographic area known as a Special
Assessment District (SAD). A special assessment may be levied only against parcels of
real estate which have been identified as having received a direct and unique
"benefit" from the public project
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 This type of tax is always a specific
and statutory lien. It can either be voluntary –
meaning the property owners in the area that is going to be affected can petition for
the improvement – or involuntary, which means that a government authority can
initiate the process.
 Special assessment taxes are imposed on real estate that requires property owners
to pay for improvements such as streets, alleys, street lighting, curbs, and similar
items that benefit their real estate. Such taxes are enforced in the same manner as
general real estate taxes, with the same lien priority after the general real estate tax.
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Special Assessment District
A Special Assessment District (SAD) is a unique geographic area in which the market
value of real estate is enhanced due to the influence of a public improvement and in
which a tax is apportioned to recover the costs of the improvement.
 Individual special assessment levies may be made only in a Special Assessment
District. The SAD is one of two kinds of geographic areas commonly associated with
a special assessment levy.
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 The other kind of geographic area is the "service district."
 Circumstances vary according to state law, but the essential distinguishing feature
between these two types of districts is this: a service district is composed of all
individual parcels of land that are somehow connected to the public improvement
for which the special assessment is to be levied. The special assessment district
consists of only those properties which are designated by the applicable law as
having received a specific and unique "benefit" from the public improvement.
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Special Assessment District
In the case of a dam, all properties located within a
scientifically defined "watershed" and all properties
lying within the floodplain of the dam are
connected by how water drains from an entire
watershed into a lake and how water within the
lake may flood specific areas downstream.
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Since the area of a watershed and the area of a floodplain are often very, very large
when compared to the area of a lake, it is possible for some portions of the watershed
and floodplain to be physically located in a government unit other than the one in
which the lake is located. It is also possible that the government unit authorizing a
special assessment levy does not have jurisdiction to include all land within the
watershed and floodplain.
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Special Assessment District
In the case of an economic development project (e.g. a parking structure for a
business district) circumstances which would cause the service district and Special
Assessment District to have differing geographic boundaries relate to the existing and
permitted use of property rather than political subdivisions. That is, economic forces
within the market would be the key to including or excluding a specific property.
The service district for a parkingwww.Mckissock.com
facility is generally
limited to the geographic area in which pedestrians would
walk between businesses and the parking structure. An
example might be that users of a parking structure will
traverse an area defined as being within six blocks or less
of a parking structure. In this example, the service district
would consist of all properties lying within six blocks of
the parking structure.
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Feedback Question – 13.
__________is the term used in the
United States to designate a unique
charge government units can assess
against real estate parcels for certain
public projects.
A
Special assessment
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B
Unique assessment
C
Helpful assessment
D
Tax assessment
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Feedback Question – 13.
__________is the term used in the
United States to designate a unique
charge government units can assess
against real estate parcels for certain
public projects.
A
Special assessment
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B
Unique assessment
C
Helpful assessment
D
Tax assessment
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Special Assessment District
Benefit
There are variations between state governments as to what constitutes a “benefit”
under special assessment laws.
In general, the "benefit" must result directly, uniquely, and specifically from the public
project.
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For example, when water and sewer lines are installed by government units, nearby
land often increases in value. The presence both of safe drinking water and of sewer
lines means that expensive wells and septic systems do not have to be installed by
affected property owners. It also means the potential for contamination of ground
water and surface areas from improperly treated sewage will be eliminated. Land that
might have been “unbuildable” before may become buildable once governmentprovided water and sewer services become available. Providing water and sewer
service are situations which may adapt formerly unusable land for residential or
commercial use. A storm sewer or a dam or dike may mitigate flooding and make
properties within the former flood zone more valuable.
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Special Assessment vs. Ad Valorem Tax
 The property tax most citizens are aware of is the ad valorem tax. Special
assessment levies are not ad valorem property taxes, even though they may be
collected on a property tax bill.
 A special assessment is based strictly upon the concepts of "need" and "benefit."
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 Special assessments require a finding that the public improvement is "needed" for
a reason consistent with the law which permits the special assessment and that
each property specially assessed receives a unique, measurable and direct benefit
from the public improvement that was needed.
 The basic idea is, if government funds make a property more valuable, the
government has the right to get money back from a property owner.
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Tax Sale
As one means of generating lost income from delinquent taxpayers, county
governments offer tax sales at auction to the public. During Tax Lien Sales, what is
purchased at these auctions is not land, rather a debt to be collected on. By purchasing
the right to collect past due taxes, a buyer is in essence loaning money to the property
owner to pay their taxes. During Tax Deed Sales however, the winning bidder will own
the deed and the land, having purchased it from the county or authority performing the
sale.
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Tax Lien Sale
 A Tax Lien or Tax Certificate Sale is a public sale, usually at auction, of the right to
collect on a delinquent taxpayer's debt.
 This sale is held by the County, generally once each year. What is purchased by the
winning bidder is not the deed to a property. The purchaser's money pays the
delinquent taxes to the County on behalf of the delinquent property owner.
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 In exchange, the purchaser is given first lien position on title, ahead of mortgages,
deeds of trust, and judgments, subordinate only to State tax liens.
 Under the terms of the sale which may differ greatly from county to county, if the
debt is not repaid with interest (rate determined at the time of sale) within a
specified time period, the purchaser of the tax lien may foreclose upon the
property, and all junior (subordinate) liens are dissolved, forgiven, or otherwise
not the responsibility of the purchaser.
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Tax Deed Sale
 A Tax Deed Sale is a public sale, usually at auction, of the deed to the property of a
delinquent taxpayer.
 The Owner and all lien holders have been given ample time and have received
proper legal notification that the property will be sold if due taxes are not
satisfied.
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 Different than a Tax Lien Certificate Sale, the winning bidder purchases the deed
to a piece of property, becoming the new owner and obtaining all rights to the
property free and clear of liens, mortgages, deeds of trust, etc.
 The more people who do bid generally means prices get higher and ultimately
may not be such great deals. Sometimes, though, not that much interest exists in
property, and people can acquire it for extremely low rates.
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Redemption
 The “right of redemption” is the right of the foreclosed homeowner to buy the home
back from the person who bought it at foreclosure.
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 Once the sale is complete, if the
home was sold by judicial foreclosure, you may buy
it back.
 This is a statutory right, meaning there has to be a specific law providing for the
right. Therefore if there is no statute there is no right of redemption.
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Understanding Property Reassessment
Buyers of commercial properties are supposed to have their properties reassessed
and pay taxes on the full value of their property when “a change in ownership has
occurred.”
 Some states’ property tax laws require in general that real property be reassessed
when there is a change in ownership. But loopholes in the law allow buyers to
avoid reassessment even if 100%
of a company changes hands.
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 The current system provides property owners with innumerable ways to structure
change of ownership transactions to avoid paying higher taxes.
 The laws governing “change of ownership” reassessments could be tightened to
require reassessment if at least 50% of a corporation’s stock or ownership shares
change hands.
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Poll Question – 14.
___________________ is a unique
geographic area in which the market
value of real estate is enhanced due to
the influence of a public improvement
and in which a tax is apportioned to
recover the costs of the public
improvement.
A
Homeowners district
B
Tax district
C
Special assessment district
D
Business district
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Poll Question – 14.
___________________ is a unique
geographic area in which the market
value of real estate is enhanced due to
the influence of a public improvement
and in which a tax is apportioned to
recover the costs of the public
improvement.
A
Homeowners district
B
Tax district
C
Special assessment district
D
Business district
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Understanding Property Reassessment
To qualify for reassessment, the following is required:
A written “Application for Reassessment” (reverse) must be filed with the AssessorRecorder within 60 days of the misfortune or calamity, or as otherwise provided by
law, but in no case more than twelve months after the occurrence of said damage. If
no application is made and the Assessor determines that within the preceding
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twelve months a property has suffered
damage caused by misfortune or calamity
that may qualify the property owner for relief under an ordinance adopted under
this section, the assessor shall provide the last known owner of the property with an
application for reassessment. The property owner shall file the completed
application with the Assessor within 60 days of the date of mailing which appears on
the notification by the Assessor, but in no case more than twelve months after the
occurrence of said damage.
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Understanding Property Reassessment
To qualify for reassessment, the following is required:
The damage to taxable property is $10,000 or more of full cash value, not including
non-taxable items such as household and personal effects. The damage or
destruction is not attributable to fault by the owner.
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Upon receiving a proper application,
the Assessor will verify damage or loss by
reappraising separately the land, improvements, and any personal property subject
to property taxation. If the total value loss is $10,000 or more, the Assessor shall
determine the percentage of loss to land, improvements and personalty. A ratio of
damaged to undamaged full cash value will be established, and the current taxable
value shall then be adjusted by the same ratio. The assessor shall notify the
applicant in writing of the amount of the proposed reassessment and state that the
applicant may appeal the proposed reassessment to the local Board of Equalization
within six months of the date of mailing the notice.
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Transfer Tax on Purchase Price of Property
The transfer of title to real estate with consideration is taxed in many states. The
methods and tax rates vary by state. Some states use "tax stamps" that are affixed to
the deed and cancelled. Generally, the calculation begins with the purchase price of
the property.
Exemptions in some states include:
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 The balance owed on an assumed mortgage
 Some states exempt property transfers below a certain stated dollar amount
 Rates and methods of rate application also vary. On the next slide we will show
you some examples of these rates and methods.
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Transfer Tax on Purchase Price of Property
An amount may be determined based upon a rate of $X for each $XXX or fractional
part of the taxable value.
For this example, we will assume that the tax rate is $0.90 for each $1,000 of taxable
value.
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Suppose the taxable value is $225,000. We will need to divide the taxable value by
$1,000 (Remember the equation $0.90 for each $1,000 - there are 225 1,000s in
$225,000).
Once we have the equation set up correctly, all that is left to do is to multiply the tax
rate ($0.90) by the taxable units (225). This gives us a tax amount of $202.50.
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Transfer Tax on Purchase Price of Property
The tax amount may also be calculated based upon a percentage of the taxable
value.
For this example, we will use the same taxable value of $225,000. The tax rate, for
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this example, will be .0055. You could
also express this as .55%.
To determine the tax amount, you will need to multiply the taxable value ($225,000)
by the tax rate (.0055). This gives you a property transfer tax amount of $1237.50.
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Transfer Tax on Purchase Price of Property
Let's say an investor is purchasing a property for $350,000, and is assuming the
existing $218,000 mortgage. The tax rate is $0.45 per $500 or fraction thereof. So, we
can start the equation with $0.45.
Finding this number is similar to the first example, but with an additional step. Since
we are assuming that a portion of the taxable value will be exempt, we must first
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calculate which portion is actually
taxable. We mentioned in the last step that the
investor is assuming the $218,000 mortgage. In this scenario, the amount that was
assumed will be exempt and the remainder is the taxable value ($350,000 - $218,000
= $132,000). We then apply the tax rate like we did in the first example. Divide
$132,000 by $500 to get the taxable units (264).
To get the property transfer tax amount, we multiply the tax rate ($0.45) by the
taxable units (264). This gives us a tax of $118.80.
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Feedback Question – 15.
What right allows a borrower in
default to redeem a property within
three months after a foreclosure sale
if the proceeds are sufficient to pay off
all indebtedness plus any other
foreclosure costs?
A
Right of redemption
B
Right of reassessment
C
Both a and b
D
Neither a nor b
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Feedback Question – 15.
What right allows a borrower in
default to redeem a property within
three months after a foreclosure sale
if the proceeds are sufficient to pay off
all indebtedness plus any other
foreclosure costs?
A
Right of redemption
B
Right of reassessment
C
Both a and b
D
Neither a nor b
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Examining Tax Considerations
 The tax benefits of home ownership may differ from those available to owners of
investment property.
 The legal reduction of tax liability,
otherwise known as tax shelter,
is available
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to all owners of a primary residence as well
as to a taxpayer who owns investment
property.
 Different rules apply to each type of
property, however, and must be followed
carefully to earn the desired tax shelter.
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Section 3
Taxes
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Federal Income Tax
 When the Tax Reform Act of 1986 reduced most tax rates and simplified the rate
structure, certain real property tax benefits were changed or repealed.
 The 60% deduction for long-term capital gain was repealed, and capital gain was
treated as ordinary income and taxed at a rate no higher than 28%.
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 Mortgage interest also became subject to different rules that could limit its
deductibility, especially if the home was refinanced, or a second mortgage, home
equity loan, or line of credit was obtained.
 The rules regarding depreciation also changed, so that all tangible property placed
in service after December 31, 1986 was subject to the modified acceleration cost
recovery system.
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Federal Income Tax
 The federal government taxes individuals based on their earnings by means of a
progressive income tax.
 The important consideration of a progressive tax is that the tax rate on which the
taxpayer’s obligation increases rises with additional levels of income.
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 One of the major reasons for buying real estate is to get relief from taxes.
 A federal income tax return must be filed by April 15 for the preceding calendar
year if adjusted gross income is high enough or federal income tax has been
withheld and a refund is due.
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Federal Income Tax
Both individuals and corporations are taxed.
The amount of gross income required before a tax is imposed on an individual
depends on:
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 Whether the income earner is married or single, including the divorced or legally
separated;
 Whether there are any dependent children;
 If there is a spouse, whether the income earner is living with the spouse and
whether income earner and spouse are filing jointly or separately.
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Feedback Question – 16.
The Tax Reform Act of _____ reduced
most rates and simplified rate
structure.
A
1986
B
1976
C
1968
D
1966
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Feedback Question – 16.
The Tax Reform Act of _____ reduced
most rates and simplified rate
structure.
A
1986
B
1976
C
1968
D
1966
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Mortgage Interest Payment Deductions
Mortgage interest payments on first and second homes are deductible from taxable
income on loan amounts up to $1,000,000. Interest on loans secured by a personal
residence, but not used to purchase the residence, is deductible on loan amounts up
to $100,000. Local property taxes are also deductible. For most homebuyers, such
deductions make the difference between an affordable home payment and one that
is not.
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Tax Credits
A tax credit is a direct deduction, not from income but from tax owed. Credits for
home solar energy system installations, as well as energy and water conservation
measures, have been available in the past. Whether they will be available again
depends on whether conservation and development of alternative sources of energy
are again viewed as desirable goals to be pursued, even at the expense of a loss in
tax revenue.
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For the Investor
An active investor is an investor who materially participates in managing the property on
a regular and substantial basis. A passive investor is an investor who does not materially
participate in managing the activity.
Investment transactions are even more complex than normal transactions. Unless a real
estate licensee is qualified as an income tax or investment counselor, offering advice on
tax and economic factors should www.Mckissock.com
be left to the client’s tax preparer or advisor.
An investor is someone who buys property for its appreciation or income potential and
who does not plan to occupy it personally. An investor cannot take advantage of the
homeowner’s exemption from federal income taxation, but receives other benefits of
property ownership. Mortgage interest and property taxes are deductible from property
income. Property income also can be reduced by such operating expenses as
maintenance, utilities, and property management.
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Depreciation
Depreciation has two important components.
 The depreciable basis of the property
is the amount that may be
depreciated. For real estate property,
this is generally the price of the
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property plus acquisition costs, minus
the value of the land.
 The second component, useful life of
an asset, is the number of years the
asset will be useful to the investor, as
determined by IRS tax laws.
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Basis of Depreciation
 Depreciation for tax purposes is not based on actual deterioration, but on the
calculated useful life of the property. The theory is that improvements, not land,
deteriorate and lose their value.
 A building is thought to have awww.Mckissock.com
certain number of years where it can generate an
income and after that is no longer a practical investment.
 The investor is compensated for the loss by being allowed to deduct a certain
dollar amount each year based on the useful life of the property until, on paper at
least, the property no longer has any value as an investment.
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Poll Question – 17.
A/an _________ investor materially
participates in managing a property,
while a/an _______ investor does not
materially participate in managing
activity.
A
Active, passive
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B
Passive, active
C
Hands-on, absentee
D
Old, new
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Poll Question – 17.
A/an _________ investor materially
participates in managing a property,
while a/an _______ investor does not
materially participate in managing
activity.
A
Active, passive
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B
Passive, active
C
Hands-on, absentee
D
Old, new
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Installment Sales
 The seller pays tax on the gain from the sale of real estate in the year the gain is
collected. In most cases, the entire gain is received in the same year as the sale
occurs.
 In an installment sale, a taxpayer sells property and receives payments over a term
that extends beyond the present tax year.
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 The seller finances the portion of the purchase price that is received in future
installments. The taxpayer can elect to report any profit on the transaction at the
time of sale or as installment payments are received.
 The taxpayer’s basis in the property plus costs of sale are totaled and deducted
from the purchase price, or deducted proportionately from each tax year’s
installment payments, with the remainder reported as taxable income.
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Installment Sales
Interest income is always taxable.
 The IRS will impute an interest rate on the purchase balance if the sales contract
does not provide for one or if the rate in the contract is below market rates.
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 Another requirement is that the
sales price must be more than $3,000, and at least
one payment must be due six months after the date of sale.
 Spreading out the reporting of income usually favors the taxpayer/seller, who may
avoid a step up to a higher tax bracket or who may not be able to pay the required
tax in the year of sale. Investment property probably will have been depreciated by
the taxpayer, and the taxpayer’s cost basis in the property reduced accordingly. To
the extent that the installment contract price exceeds the property’s reduced basis,
it must be reported as gain in the year of sale.
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Installment Sales
 Taxpayers selling real property and receiving one or more payments in a later year
or years must report the sale as an installment sale unless the taxpayer specifically
elects otherwise.
 By selling on multi-year terms, a taxpayer avoids bunching gain/income in the year
of sale. Rather, recognition of gain is deferred by spreading it over a number of tax
years.
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 The installment sale method may be used for any kind of real estate, including
vacant land.
 The taxable part of installment payments is calculated by applying to each payment
the profit percentage realized on the full transaction. This percentage is found by
dividing the realized profit on the sale by the full contract price. IRS instructions
should be followed for determining this percentage, based on the contract price,
selling price, gross profit, and payments received.
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Feedback Question – 18.
______, not _______, deteriorate and
lose value.
A
Land, improvements
B
Owners, sellers
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C
Improvements, land
D
None of the above
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Feedback Question – 18.
______, not _______, deteriorate and
lose value.
A
Land, improvements
B
Owners, sellers
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C
Improvements, land
D
None of the above
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Considering Home Valuation and Property Taxes
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Assessed value is price placed on land and buildings by a government tax assessor
for use in levying property taxes. The assessed value of the property may be
different than the appraised value. Appraised value or market value is rarely the
same as assessed value.
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Considering Home Valuation and Property Taxes
Most appraisers use one of three approaches to establish the value of a property.
Sales Comparison
Approach
Cost Approach
Income Capitalization
Approach
The Sales Comparison Approach is normally considered to be the best indication
of value for residential property.
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In this approach, the appraiser finds three to four comparable properties in the
neighborhood which have recently sold. Ideally, these properties are within a
one-half mile radius of the subject property and have sold within the last six
months. The principle states that the maximum value of a house and property
tends to be set by the sales price of an equivalent, equally desirable, similar
substitute house and property, for a certain moment in time. The appraiser
compares the sold properties to the subject property.
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Considering Home Valuation and Property Taxes
Most appraisers use one of three approaches to establish the value of a property.
Sales Comparison
Approach
Cost Approach
Income Capitalization
Approach
This approach considers the value of the land, assumed vacant, added to the cost
to reconstruct the appraised building
as new on the date of value, less the
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accrued depreciation the building suffers in comparison with a new building.
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Considering Home Valuation and Property Taxes
Most appraisers use one of three approaches to establish the value of a property.
Sales Comparison
Approach
Cost Approach
Income Capitalization
Approach
In this approach, the potential net income of the property is capitalized to arrive
at a property value. This approach
is suited to income-producing properties and
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is usually used in conjunction with other valuation methods. The process of
converting a future income stream to a present value is known as capitalization.
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Feedback Question – 19.
Which of the following is the best
method of establishing the value of a
residential property?
A
Sales Comparison Approach
B
Cost Approach
C
Income Capitalization Approach
D
Land Use Approach
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Feedback Question – 19.
Which of the following is the best
method of establishing the value of a
residential property?
A
Sales Comparison Approach
B
Cost Approach
C
Income Capitalization Approach
D
Land Use Approach
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Capital Gain on Home Sale
Before the 1997 Tax Act, capital gains were taxed at a 28% maximum tax rate if the
capital assets were held more than one year. The new tax Act brought a new set of
rules. The 1997 Tax Act cuts the top tax rate on capital gains of individuals and
introduces new holding period rules. Since July 28, 1997, there have been two
different types of capital gains for non-corporate taxpayers:
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 Short-term gains, which are taxed
at ordinary income rates;
 Long-term capital gains.
For tax years beginning after the year 2000, the maximum capital gains rate for longterm gains is 15%.
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Types of Gain
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GAINS
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Types of Gain
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GAINS
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Types of Gain
Recognized Gain
The part of the realized gain for which
income tax must be paid is called
recognized gain. Losses on a personal
residence cannot be recognized; that is,
they may not be written off.
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GAINS
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Types of Gain
Recognized Gain
The part of the realized gain for which
income tax must be paid is called
recognized gain. Losses on a personal
residence cannot be recognized; that is,
they may not be written off.
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GAINS
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Types of Gain
Recognized Gain
The part of the realized gain for which
income tax must be paid is called
recognized gain. Losses on a personal
residence cannot be recognized; that is,
they may not be written off.
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GAINS
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Poll Question – 20.
The maximum tax rate for taxing
capital gains before 1997 was:
A
38%
B
28%
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C
18%
D
8%
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Poll Question – 20.
The maximum tax rate for taxing
capital gains before 1997 was:
A
38%
B
28%
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C
18%
D
8%
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Calculation of Gain or Loss
When calculating capital gains, one must first understand the basis.
“Basis is the amount of an investment in property for tax purposes,” according to
IRS Publication 551. “Use the basis of property… to figure gain or loss on the sale
or other disposition of property.”
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The amount of gain from the sale of a principal residence is the difference between
the net sales price and the adjusted cost basis. The net sales price is the selling price
less selling expenses. To calculate the gain on the sale of a primary residence, the
cost basis usually is determined to be the original purchase price. So to compute the
gain or loss, subtract the adjusted cost basis from the net sales price.
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Calculation of Gain or Loss
 The taxable gain generally is the difference between the purchase price plus
capital improvements and the price when sold.
 Closing costs on the sale also may be added to the cost basis.
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 When capital improvements plus costs of the sale are added to the original cost
basis, the “adjusted cost basis” is the result.
The adjusted cost basis is the owner’s original cost plus buying expenses, plus capital
improvements, less certain deductions. Deductions include the nontaxable gain
deferred from the sale of a prior residence and any depreciation or casualty losses
taken.
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Calculation of Gain or Loss
Increases in Basis
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Increases in basis result from
improvements to property that has a
useful life of more than one year.
Generally the costs of improvements
which add to the basis of an asset
include supplies and materials purchased
for major repairs or additions, legal fees,
recording fees, and similar charges
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Calculation of Gain or Loss
Decreases in Basis
Increases in Basis
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Increases in basis result from
improvements to property that has a
useful life of more than one year.
Generally the costs of improvements
which add to the basis of an asset
include supplies and materials purchased
for major repairs or additions, legal fees,
recording fees, and similar charges
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Basis is reduced by any event that
represents a return of capital. This
includes depreciation, expensing
deduction (under the Internal Revenue
Code Section 179), casualty losses, and
depletion.
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Feedback Question – 21.
The _____ value is the value which will
be used to compute depreciation and
gain or loss on the sale of the asset.
A
Capital
B
Book
C
Federal
D
Increased
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Feedback Question – 21.
The _____ value is the value which will
be used to compute depreciation and
gain or loss on the sale of the asset.
A
Capital
B
Book
C
Federal
D
Increased
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Capital Improvements vs. Maintenance
Improvements are additions that add value to the property. Repairs are
expenditures to maintain the current condition of the property.
For example: a homeowner may www.Mckissock.com
paint
the house, fix some windows, replace a
broken gutter, or add aluminum siding
over the existing wood siding. These
items are ordinary repairs and
maintenance except for the new siding,
which is a capital improvement.
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Capital Gain Exclusion
 The tax laws allow a taxpayer who sells his or her principal residence to exclude the
gain on the sale if certain conditions are met.
 A principal residence is considered for tax purposes to be the primary place where
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the taxpayer resides.
 The taxpayer may reside in more than one place, but can have only one principal
residence. Therefore, second homes and summer homes do not qualify.
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Capital Gain Exclusion
Generally, some or all of the gain from the sale is excluded from income taxes if:
 The exclusion is limited to $250,000 for taxpayers filing singly and $500,000 for
married couples filing joint returns.
 A married couple both occupied the home for two out of the last five years and
one of them owned the home.
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 The two years do not have to be the most recent years, nor do they have to be
consecutive.
 The exclusion cannot be used more than once every two years.
 The taxpayer owned and occupied the property as his or her principal residence
for at least two of the five years before the sale. A prorated exemption can be
claimed if sold before two years because of a job-related move or for health
reasons.
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Determining Gain
The seller’s escrow statement lists a number of expenses. The expenses are write-offs
or deductions, selling expenses, or nondeductible expenses. The mortgage interest
and real estate taxes are deductions. Selling expenses, however, are not deductions;
they are used to reduce the gain. When sellers pay points for a buyer’s loan, the
points are not considered to be interest paid by the buyer. For the seller, they are a
sales expense that will reduce any gain.
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Feedback Question – 22.
What additions add value to a
property?
A
Improvements
B
Maintenance
C
Repairs
D
Only luxury items
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Feedback Question – 22.
What additions add value to a
property?
A
Improvements
B
Maintenance
C
Repairs
D
Only luxury items
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Determining Tax on a Property
The fraction used to determine assessed value from market value is called the
assessment ratio. Furthermore, some jurisdictions exempt certain amounts of a
property’s assessed value to provide tax relief for certain types of property owners.
Subtracting the amounts of exemptions from assessed value gives the property’s
taxable value. In determining property taxes, we could consider a property with a
market value of $210,000 in a jurisdiction that applies an assessment ratio of 40%.
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Determining Tax on a Property
From the government’s perspective, the steps in administering the property tax are:
 property value assessment;
 development of the budget and tax rate;
 tax billing and collection.
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Taxation is an indirect yet significant controlling device affecting estimates of value. It
is important for those engaged in the real estate business to know the variety of taxes
and their effect on property transfers. Full consideration may involve retaining the
services of accounting, legal, and tax specialists. There are many categories of
property that may be exempt from taxation.
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Section 4
FORECLOSURES
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Foreclosure
Foreclosure is the most commonly used legal process by which a lender or other real
property lien holder may dispossess you of your home and sell the home in order to
obtain repayment of a debt.
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Foreclosure
 The foreclosure process (judicial or non-judicial) in most states is a very technical
process which the lender must follow. It is also time-consuming and may take a
minimum of a couple months.
 If the lender does not strictly adhere to the technical, statutory requirements, then
the foreclosure may be set aside or the lender may have to redo the foreclosure,
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which could add more time to the process.
 It is common for state statutes to provide a redemption period for homeowners,
whereby an owner who is being foreclosed on may stop the foreclosure at any time
up to the minute of the foreclosure sale by paying all amounts owed on the loan,
including late fees, accrued interest, and the lender’s costs of foreclosure up to that
point.
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Types of Foreclosures
Foreclosure by Judicial Sale
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It is available in every state and required
in many; involves the sale of the
mortgaged property under the
supervision of a court, with the proceeds
going first to satisfy the mortgage, then
other lien holders and, finally, the
mortgagor/borrower if any proceeds are
left.
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Types of Foreclosures
Foreclosure by Judicial Sale
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Foreclosure by Power of Sale
It is available in every state and required
in many; involves the sale of the
mortgaged property under the
supervision of a court, with the proceeds
going first to satisfy the mortgage, then
other lien holders and, finally, the
mortgagor/borrower if any proceeds are
left.
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This type of foreclosure is also allowed
by many states if a power of sale clause
is included in the mortgage or if a deed
of trust was used instead of a mortgage.
In some states so-called mortgages are
actually deeds of trust. It involves the
sale of the property by the mortgage
holder without court supervision.
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Poll Question – 23.
Which foreclosure process is available
in every state?
A
Foreclosure by Power of Sale
B
Foreclosure by Tax
C
Foreclosure by Judicial Sale
D
Both a and b
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Poll Question – 23.
Which foreclosure process is available
in every state?
A
Foreclosure by Power of Sale
B
Foreclosure by Tax
C
Foreclosure by Judicial Sale
D
Both a and b
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Foreclosures Process
Pre-Foreclosure
In the pre-foreclosure stage, investors will likely be able to do the most good for
the distressed homeowner and for themselves. Pre-foreclosure is where further
damage to the homeowner's credit rating can be forestalled and the home may be
transferred at a mutually-agreed-upon price before it is necessary to get the
lender involved. This stage can last from one month to a year, depending on your
local laws.
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Foreclosures Process
Pre-Foreclosure
Foreclosure Stage
The foreclosure auction is the most commonly known way in which a foreclosure
can be purchased. If the homeowner does not reinstate their mortgage, the
property goes to a public auction, where anyone can bid. Auctions can be tough
because they sometimes occurwww.Mckissock.com
on short notice and don't allow you much time to
do research and analysis of the property.
The foreclosure process itself will vary from one state to the next, depending on
whether it is a title or lien state, which determines whether a judicial or nonjudicial form of foreclosure is involved.
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Foreclosures Process
Pre-Foreclosure
Foreclosure Stage
Post Foreclosure
At the post-foreclosure stage, the lender has already taken control of the property.
The home is then in the possession of the lender's REO (Real Estate Owned)
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department, or in the hands of a new owner or investor who purchased the
property at auction.
Refer to the foreclosure notice to determine the name of the lender as well as the
balance owed on the mortgage. Lenders are typically extremely willing sellers,
because an REO on the books is an obvious sign of having made a poor lending
decision. Both the overhead and losses involved with an REO – reflected in both
the added reserves a lender must maintain as well as any potential property
management fees incurred – means the bank is likely a willing negotiator.
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Feedback Question – 24.
In what part of the foreclosure process
will investors be able to do the most
good for the homeowner?
A
Post-Foreclosure
B
Foreclosure
C
Mid-Foreclosure
D
Pre-Foreclosure
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1-800-328-2008
Feedback Question – 24.
In what part of the foreclosure process
will investors be able to do the most
good for the homeowner?
A
Post-Foreclosure
B
Foreclosure
C
Mid-Foreclosure
D
Pre-Foreclosure
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Contesting a Foreclosure
 Because the right of redemption is an equitable right, foreclosure is an action in
equity. In order to keep the right of redemption, the debtor can ask an equity
court for an injunction.
 If repossession is imminent, the debtor would need to seek a temporary
restraining order. However, the
debtor may have to post a bond in the amount of
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the debt. This would protect the creditor if the attempt to stop foreclosure were
a naked attempt to cheat the lender and skip on the debt.
 A debtor may also challenge the validity of the debt in a claim against the bank in
order to stop the foreclosure and sue for damages. In a foreclosure proceeding,
the lender bears the burden of proving that there was a valid debt.
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Contesting a Foreclosure
There is case law to support the debtor's case: First
National Bank of Montgomery v. Jerome Daly, 1969,
in the Justice Court State of Minnesota; the Judge
ruled in favor of the debtor on December 9, 1968:
IT IS HEREBY ORDERED, ADJUDGED AND DECREED:
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 That the Plaintiff is not entitled to recover the possession of Lot 19, Fairview
Beach, Scott County, Minnesota according to the Plat thereof on file in the Register
of Deeds office.
 That because of failure of a lawful consideration the Note and Mortgage dated
May 8, 1964 is null and void.
 That the Sheriff’s sale of the above described premises held on June 26, 1967 is
null and void, of no effect. That because of failure of a lawful consideration the
Note and Mortgage dated May 8, 1964 is null and void.
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Delaying a Foreclosure
The lender may agree to forbear, or hold off on, foreclosing for
a specified period of time, during which time the lender may
Reinstatement agree to allow the homeowner to pay less than the full
amount of their mortgage; however, in the end the
Repayment Plan homeowner will eventually have to pay all amounts owed
under the loan with applicable interest and late fees.
Mortgage Modification
Refinance
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Home Sale
Short Sale
Loan Assumption
DIL of Foreclosure
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Delaying a Foreclosure
Forebearance
In many states a homeowner has a statutory right, regardless
of the lender’s attitude, up to a certain point in the
Repayment Plan foreclosure process, to reinstate the loan or cure the default
on the loan by paying all unpaid monthly payments with
Mortgage Modification
applicable interest and late fees, in which case your loan is
reinstated,
the foreclosure is stopped, and the homeowner
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Refinance
has the right to continue making monthly payments on their
loan as if a default had not occurred.
Home Sale
Short Sale
Loan Assumption
DIL of Foreclosure
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Delaying a Foreclosure
Forebearance
Reinstatement
The lender may agree to allow the homeowner to continue
to make regular monthly payments on the loan and allow
you to pay additional amounts each month to repay
Mortgage Modification
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owed for previously missed payments, interest and
Refinance
late fees.
Home Sale
Short Sale
Loan Assumption
DIL of Foreclosure
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Feedback Question – 25.
The right of redemption is an
_________ right.
A
Equitable
B
Unfair
C
Excessive
D
Undue
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Feedback Question – 25.
The right of redemption is an
_________ right.
A
Equitable
B
Unfair
C
Excessive
D
Undue
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Delaying a Foreclosure
Forebearance
Reinstatement
Repayment Plan
Refinance
Home Sale
The lender may agree to refinance or modify the
homeowner’s
loan so that they can pay smaller amounts over
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a longer period of time. This option works well if the loan
amount is less than the value of the home or interest rates are
currently lower than the existing interest rate
Short Sale
Loan Assumption
DIL of Foreclosure
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Delaying a Foreclosure
Forebearance
Reinstatement
Repayment Plan
Mortgage Modification
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The homeowner may be able to find a different lender to
provide them with a new loan, which will pay off the existing
loan in default. This may be a particularly good option if the
Home Sale
homeowner has significant equity in the home (which may
allow you to avoid having to pay mortgage insurance as part
Short Sale
of the loan payment, etc.) or if interest rates or loan
Loan Assumption products currently available are more favorable than their
existing loan terms.
DIL of Foreclosure
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Delaying a Foreclosure
Forebearance
Reinstatement
Repayment Plan
Mortgage Modification
Refinance
Short Sale
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The lender may agree to delay the foreclosure process to
allow the homeowner enough time to sell their home and pay
off the loan
Loan Assumption
DIL of Foreclosure
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Poll Question – 26
When a lender agrees to hold off on
foreclosing for a specified period of
time, this is called:
A
Reinstatement
B
Forbearance
C
Repayment plan
D
Refinancing
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Poll Question – 26
When a lender agrees to hold off on
foreclosing for a specified period of
time, this is called:
A
Reinstatement
B
Forbearance
C
Repayment plan
D
Refinancing
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Delaying a Foreclosure
Forebearance
Reinstatement
Repayment Plan
Mortgage Modification
Refinance
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The lender may allow the homeowner to sell their property
Home Sale
for less than the outstanding loan amount, in which case the
lender would keep the sale proceeds and forgive the
remaining debt; however, it is worth noting that in a short
sale situation a homeowner may also experience federal and
Loan Assumption state income tax liability for that portion of the debt that was
forgiven which will likely be treated as income to them for tax
DIL of Foreclosure purposes.
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Delaying a Foreclosure
Forebearance
Reinstatement
Repayment Plan
Mortgage Modification
Refinance
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Home Sale
The lender may allow the homeowner to sell the home and
Short Sale
allow a qualified buyer to take over or assume their loan and
make the loan payments. However, if a homeowner decided
to do this, they should make sure that the loan assumption
documents specifically release them from any further liability
DIL of Foreclosure for the loan.
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Delaying a Foreclosure
Forebearance
Reinstatement
Repayment Plan
Mortgage Modification
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The lender
may allow the homeowner to give property to the
lender by executing a deed in lieu of foreclosure in exchange
for the lender forgiving the debt. Signing a deed in lieu of
Home Sale
foreclosure means that the homeowner is actually conveying
all of their ownership of the property to the lender or grantee
Short Sale
under the deed. This option can still have a negative impact on
Loan Assumption their creditworthiness, but may not be as damaging as a
foreclosure. If a homeowner uses this method, they should try
to negotiate from the lender a full written release of any
further obligation or liability relating to the debt.
Refinance
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Feedback Question – 27.
If a lender agrees to refinance or
modify a homeowner’s loan so they
can make smaller payments over a
longer period of time, it is called:
A
Reinstatement
B
Forbearance
C
Mortgage modification
D
Repayment plan
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Feedback Question – 27.
If a lender agrees to refinance or
modify a homeowner’s loan so they
can make smaller payments over a
longer period of time, it is called:
A
Reinstatement
B
Forbearance
C
Mortgage modification
D
Repayment plan
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The Upside and Downside to Foreclosures
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For a smart and hopefully generous
investor, purchasing foreclosed properties
can be a terrific real estate deal. The hope
is that both parties to the transaction win
by profiting from a timely transfer of title
– which produces a good investment for
the investor and divestment for the
homeowner – and it might spare the
homeowner's credit rating before things
get any worse.
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The Upside and Downside to Foreclosures
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For a smart and hopefully generous
Profiting from foreclosures isn't the noinvestor, purchasing foreclosed properties
brainer many assume it to be. For each
can be a terrific real estate deal. The hope success story, there are likely five horror
is that both parties to the transaction win
stories. Every real estate transaction
by profiting from a timely transfer of title
involves risk. While investors with the
– which produces a good investment for
very best of intentions can help to
the investor and divestment for the
reduce their risk, they cannot completely
homeowner – and it might spare the
eliminate it.
homeowner's credit rating before things
get any worse.
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Poll Question – 28.
Who can benefit the most from a
foreclosure?
A
An investor
B
The homeowner
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C
The bank
D
The economy
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Poll Question – 28.
Who can benefit the most from a
foreclosure?
A
An investor
B
The homeowner
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C
The bank
D
The economy
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Borrower's Obligations
 The mortgagor may be required to pay for Private Mortgage Insurance, or PMI, for
as long as the principal of his/her primary mortgage is above 80% (or 78% for
FHA) of the value of his property. In most situations, insurance requirements are
sufficient to guarantee that the lender will get some pre-defined percentage of
the loan value back, either from foreclosure auction proceeds or from PMI, or a
combination of the two.
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 Nevertheless, in an illiquid real estate market or following a significant drop in
real estate prices, it may happen that the property being foreclosed is sold for less
than the remaining balance on the primary mortgage loan, and there may be no
insurance to cover the loss. In this case, the court overseeing the foreclosure
process may enter a deficiency judgment against the mortgagor. Deficiency
judgments can be used to place a lien on the borrower's other property that
obligates the mortgagor to repay the difference. It gives the lender a legal right to
collect the remainder of debt from the mortgagor's other assets (if any exist).
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Thank you for being a McKissock customer!
Please fill out the evaluation form.
We value your input!
We hope you enjoyed the course, and if you have any
questions, please don’t hesitate to call us at
1-800-328-2008.
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