Depreciation +16California · Real Estate · English

Depreciation is 'loss in value from any cause.' Three types: Physical deterioration (wear, deferred maintenance, dry rot/termites), Functional obsolescence (poor design, outdated equipment, superadequacies), and External obsolescence (adverse outside influences). The first two are inherent (curable or incurable); external is almost always incurable.

• ✓Depreciation = loss in value from any cause
• ✓Three types: physical deterioration, functional obsolescence, external obsolescence
• ✓Physical and functional may be curable or incurable; external is almost always incurable
• ✓Depreciation is estimated only for improvements, not land

Accrued depreciation is that already occurred; remainder is future. Methods: Straight line/age-life (equal annual rate using effective age); Cost-to-cure/observed condition (breakdown method); Reproduction/replacement cost method; and Market data (abstraction) method. Effective age may differ from actual age.

• ✓Straight-line/age-life: total life divided into equal annual rate (e.g., 50-yr life = 2%/yr)
• ✓Effective age is generally used instead of actual age
• ✓Cost-to-cure (breakdown) is the most refined method
• ✓Measure between curable and incurable is economic feasibility

Book depreciation is the owner's tax deduction from original cost basis over useful life (a paper calculation/tax shelter). Actual depreciation used by appraisers is loss in value determined by market data, deducted from current reconstruction cost new. Agents should not rely on book values.

• ✓Book depreciation = tax deduction from owner's original (historic) cost
• ✓Actual depreciation = loss in value from current reconstruction cost new
• ✓Book value = original cost + capital additions − accumulated depreciation
• ✓Depreciation is allowed on improvements only, not land

Future depreciation has not yet occurred but will come, significant in capitalization. It relates to recapture (return OF investment) versus interest (return ON investment). Measured by straight-line or sinking fund methods. Salvage value need not be returned through annual depreciation.

• ✓Recapture = return OF investment; interest/profit = return ON investment
• ✓Two methods: straight-line and sinking fund
• ✓Salvage value need not be returned through annual depreciation charge

An encumbrance is anything affecting or limiting fee simple title or value (mortgages, easements). A lien makes specific property security for a debt (judgments, taxes, mortgages, deeds of trust). An easement is a right/interest limited to a specific purpose in another's land. An encroachment is unlawful intrusion onto adjacent property.

• ✓An encumbrance affects or limits title or value of property
• ✓A lien makes specific property security for payment of a debt
• ✓An easement is a limited right in another person's land
• ✓An encroachment is an unlawful intrusion onto adjacent property

Constructive notice is notice of title condition given by official government records, not requiring actual knowledge. Lis pendens is a recorded notice warning that title/possession is in litigation, giving constructive notice of pending litigation. An acknowledgment is a formal declaration before a notary confirming a signatory executed an instrument freely.

• ✓Constructive notice is provided by public records regardless of actual knowledge
• ✓Lis pendens gives constructive notice of pending litigation affecting title
• ✓An acknowledgment is a notary's confirmation that the signer executed the instrument

Eminent domain is the government's right to acquire property for public use by condemnation with fair compensation, guaranteed by the 5th Amendment. Condemnation is the act of taking private property for public use with just compensation, or declaring a structure unfit. Dedication is giving land by its owner to public use, accepted by authorized officials. Confiscation is seizing property without compensation.

• ✓Eminent domain requires just/fair compensation under the 5th Amendment
• ✓Condemnation is the exercise of eminent domain taking property for public use
• ✓Confiscation is seizure of property WITHOUT compensation

An affidavit is a written statement sworn or affirmed before an authorized officer. An affiant makes an affidavit. An affidavit of title is a sworn statement by seller/grantor certifying no judgments, bankruptcies, unrecorded deeds, or title defects since the contract date and that the affiant possesses the property.

• ✓An affidavit is a written statement sworn before an authorized officer
• ✓An affidavit of title certifies no known title defects since examination and possession by the affiant

All employment arrangements between broker and salesmen should be in writing and signed by both parties, specifying rights on termination. All listings acquired by a salesman during employment shall be the exclusive property of the Employing Broker after termination.

• ✓Broker-salesperson employment arrangements should be in writing and signed by both
• ✓Listings acquired by a salesperson during employment belong to the Employing Broker after termination

A Realtist should never publicly criticize a fellow Realtist and shall express opinions only when requested by a principal. A Realtist shall never seek information about a fellow Realtist's transaction to close it himself or divert the client. A cooperating Realtist must respect the listing Broker's agency until it expires. Negotiations on exclusively listed property should be with the listing Broker, not the owner.

• ✓A Realtist should never publicly criticize a fellow Realtist
• ✓Negotiations on exclusively listed property should be carried on with the listing Broker, not the owner
• ✓A cooperating Realtist must respect the listing Broker's agency until it expires

A Realtist should be loyal to his/her local Board and active in its work. To avoid controversy with fellow Realtists in the same local Board, disputes should be submitted in writing for arbitration per Board regulations, not an action at law, and the arbitration decision accepted as final and binding. Disputes between Realtists of different boards go to an Arbitration Board of arbitrators chosen by each, plus additional members making an odd number.

• ✓Controversies between Realtists of the same board should be settled by binding arbitration, not lawsuit
• ✓Arbitration decisions are accepted as final and binding
• ✓Cross-board disputes use an Arbitration Board with an odd number of members

A Realtist shall not solicit a fellow Realtist's employee without the employer's express written consent, nor place a sign on property without the owner's written consent. Local boards hear complaints within their jurisdiction, with appeals through the Regional Vice President to the NAREB Board of Directors; procedures comply with Robert's Rules of Order. A Realtist accused of a Code violation must be given opportunity to present all pertinent information.

• ✓No soliciting a fellow Realtist's employee without the employer's written consent
• ✓No sign placed on property without the owner's written consent
• ✓Complaint appeals go through the Regional Vice President to NAREB's Board of Directors
• ✓A charged Realtist must be given opportunity to present all pertinent information

Zoning is a public restriction imposed by city/county ordinance establishing zones and standards for structures. To be valid, zoning must be substantially related to public health, safety, morals, or general welfare, be uniform, and not discriminatory. Zoning affects only the use of land, not the title.

• ✓Zoning must relate to public health, safety, morals, or general welfare and be uniform
• ✓Zoning affects only the use of land/property, not the title
• ✓Public authorities may enjoin or abate improvements that violate a zoning ordinance

An encroachment is a fence, wall, or building extending over a boundary line. It may be lawful (through adverse possession or prescriptive/implied easement) or wrongful (subject to a damages suit and possible court-ordered removal). If slight, costly to remove, and an excusable mistake, a court may award damages instead of removal.

• ✓Encroachment may be lawful via adverse possession or easement, or wrongful and subject to removal
• ✓For a slight, mistaken encroachment with high removal cost, a court may award damages in lieu of removal
• ✓A boundary line adjustment or variance may be required and administrative remedies exhausted first

An option is a contract requiring actual consideration (even nominal, e.g., 25 cents); a mere recital is insufficient (lease provisions are sufficient consideration for an option in a lease). Options run from seller to buyer, rendering the underlying offer irrevocable for the specified period. Option rights are assignable but give no interest in land, so cannot be mortgaged.

• ✓An option requires actual consideration passing from optionee to optionor
• ✓A mere recital of consideration is insufficient
• ✓Options render the underlying offer irrevocable for the specified period
• ✓Option rights are assignable but do not give an interest in the land

An option to purchase gives the buyer the right to buy at a fixed price within a set time. It does not bind the optionee to perform; the owner has no recourse for damages or specific performance. Time is of the essence and strictly construed. The option terminates automatically upon expiration without exercise. A recorded but unexercised option should be cleared by recording a quitclaim deed.

• ✓Time is of the essence in an option and is strictly construed
• ✓An option does not bind the optionee to perform
• ✓A recorded unexercised option should be cleared by a quitclaim deed
• ✓A broker earns commission on an option only if the option is exercised

An individual cannot be licensed as an escrow holder/agent; a corporation duly organized for escrow business must hold the license. Applicants must be financially solvent and furnish a surety bond of $25,000 or more based on yearly average trust fund obligations. All officers, directors, trustees, and employees with access to money or negotiable instruments must furnish a bond of indemnification against loss. All escrow money must be placed in a trust account exempt from execution or attachment.

• ✓An individual cannot be licensed as an escrow agent — only a duly organized corporation may hold the license
• ✓Applicants must be financially solvent and furnish a surety bond of $25,000 or more
• ✓Escrow funds must be in a trust account exempt from execution or attachment

The FACT Act (2003), an extension of Gramm-Leach-Bliley, includes the Red Flag Rules and Address Discrepancy Policy (effective August 1, 2009). Depository institutions and creditors with covered accounts must establish written programs to identify, detect, prevent, and mitigate identity theft. Covered accounts are used primarily for personal, family, or household purposes involving multiple payments, plus accounts with foreseeable identity theft risk.

• ✓Red Flag Rules require a written program to detect, prevent, mitigate, and update against identity theft
• ✓Covered accounts are used primarily for personal/family/household purposes with multiple transactions
• ✓The Red Flag Rules fall into five categories including consumer reporting alerts and suspicious documents
• ✓MLB/MLO transaction files must be maintained a minimum of three years

The program must be approved by the board of directors (or a senior employee if no board), and any changes must be approved. It requires staff training and oversight of third-party service providers. There are no criminal penalties, but violators face civil penalties of $1,000 per occurrence, a fine of $2,500 per occurrence, plus actual damages. California law separately requires secure disposal of personal information records.

• ✓The Red Flag program must be approved by the board of directors or a designated senior employee
• ✓Civil penalties are $1,000 per occurrence, a fine of $2,500 per occurrence, plus actual damages
• ✓California requires shredding/erasing personal information records for lawful disposal (Civil Code 1798.80)

Services performed as real estate salespersons/brokers are excluded from covered employment for UI, ETT, DI, and PIT withholding if three conditions are met, establishing independent contractor status for state tax purposes.

• ✓Individual must be a licensed real estate broker or salesperson
• ✓Substantially all remuneration must be based on sales/output, not hours worked
• ✓Must have a written contract stating the individual is not an employee for state tax purposes
• ✓If not excluded (employees under common law), they are subject to UI, ETT, DI, and PIT withholding

California imposes sales tax on retailers selling tangible personal property and use tax on storage/use/consumption of such property. A broker may face these taxes on personal property conveyed with real estate and on successor liability when a business is sold.

• ✓Sales tax imposed on retailers; retailer liable whether or not collected from customers
• ✓Use tax is the liability of the purchaser until paid to state or a receipt obtained from registered retailer
• ✓Tax applies to personal property/buildings severed by the seller (not if severed by purchaser)
• ✓Successor purchaser may be liable for seller's tax; hold escrow money until tax clearance from Board of Equalization

A broker selling mobilehomes as a retailer must hold a seller's permit and report sales/use tax. New mobilehomes for residence are taxed as retailer-consumer on a percentage of purchase price; treatment of used mobilehomes depends on property-tax status.

• ✓Broker selling mobilehomes as retailer must hold a seller's permit
• ✓New mobilehome for residence: broker is retailer-consumer, pays tax on 75% of broker's purchase price
• ✓Unattached furnishings taxed at full retail selling price unless exempt
• ✓If mobilehome is subject to property tax, neither sales nor use tax applies

Under Government Code Sections 7150-7229, state tax liabilities constitute an enforceable state tax lien on all real property in California, but the lien is not valid against certain prior parties.

• ✓State tax lien attaches to all real property in the state
• ✓Not valid against a successor in interest without knowledge, a security interest holder, a mechanic's lienor, or a judgment lien creditor acquiring before recording

The Map Act generally requires tentative and final maps for subdivisions of five or more parcels/condominiums/interests, and a parcel map when a final map is not required.

• ✓Tentative and final maps required for five or more parcels, condominiums, community apartment interests, or stock cooperative conversions of five or more units
• ✓A parcel map is generally required if a final map is not required
• ✓Exceptions to final map requirement are in Government Code Section 66426; parcel map exceptions in Section 66428

Local governments may require dedication of subdivision land for streets, alleys, utility easements, drainage, access, and bicycle paths.

• ✓May require dedication for streets, alleys, public utility easements, drainage easements, access easements, and bicycle paths
• ✓Access easements may include public access to adjacent shoreline

Cities/counties may require park contributions in land or money. The requirement depends on the number of parcels, with industrial subdivisions exempt.

• ✓Fifty or fewer parcels: subdivider may be required to pay a dollar amount proportionate to parcel count
• ✓More than fifty parcels: ordinance may require dedication of property for park/recreational use
• ✓There is no provision for reimbursement for dedicated park land
• ✓Industrial subdivisions are exempt from these requirements

Under the Map Act and School Facilities Act, a local ordinance may require school site dedication at tentative map approval, with acceptance and payment rules.

• ✓The dedication requirement must be imposed at the time of tentative map approval
• ✓The school district must agree to accept within 30 days or the requirement terminates automatically
• ✓The district pays original cost plus improvements, interest, taxes, and maintenance costs
• ✓Applicable only to a subdivider who has owned the land less than ten years before filing a tentative map

When a lease is involved, the broker must determine its status: whether the landlord will permit assignment and under what terms, whether a sublease or new lease is possible, whether a bonus is demanded and who pays it, and how percentage lease accounting is handled. The buyer should reimburse the seller through escrow for prepaid rent and/or security money. The broker should carefully read the lease before quoting facts to a buyer.

• ✓Broker must determine whether the landlord will permit lease assignment and under what terms
• ✓Buyer should reimburse seller through escrow for prepaid rent and/or security deposit
• ✓Broker should carefully read the lease before quoting facts; buyer will likely need competent legal advice

A will disposes of property after death; a testator makes a will. Intestate means dying without a valid will, with property passing to heirs. An administrator is appointed to administer an intestate estate; an executor carries out a will. Devise is a gift of real property by will; bequest/legacy is personal property.

• ✓Dying intestate means no valid will, so property passes to heirs at law
• ✓An executor carries out a will; an administrator handles an intestate estate
• ✓A devise is a gift of real property by will

Ad valorem means according to value, used for real estate taxation. Assessed valuation is the value set by a public authority as a tax basis. A tax deed conveys title from a tax sale for nonpayment of taxes. Documentary transfer tax applies to real property transfers in a county.

• ✓Ad valorem taxes are levied according to property value
• ✓A tax deed conveys only such title as the defaulting taxpayer had
• ✓Documentary transfer tax applies to transfers of real property in a county

Capital gain is the amount by which net sale proceeds exceed adjusted cost basis, taxed at (usually lower) rates by holding period. Basis is the acquisition cost; adjusted cost basis adds improvements and deducts depreciation. Tax-free exchange trades properties without paying income tax on gain at trade. Installment reporting spreads gain over years.

• ✓Capital gain equals net sale proceeds minus adjusted cost basis
• ✓Adjusted cost basis adds improvement costs and deducts depreciation
• ✓A tax-free exchange defers income tax on gain at the time of trade

Straight line depreciation writes off improvements at a constant rate over useful life. Accelerated methods (declining balance, double declining balance, sum of the years digits, ACRS) allow greater early write-offs. Salvage value is the anticipated value at end of useful life. Only improvements, not land, are depreciable.

• ✓Straight line depreciation is a constant rate over the estimated useful life
• ✓Accelerated depreciation allows greater deductions in early years for faster capital recovery

A net lease requires the lessee to pay property charges (taxes, insurance, maintenance) plus rent. A percentage lease bases rent on business volume. A sandwich lease lies between the primary and operating leases.

• ✓Net lease: lessee pays taxes, insurance, and maintenance plus rent
• ✓Percentage lease: rent based on gross receipts with a minimum
• ✓Sublease is a lease given by a lessee

Property management is a branch of the real estate business involving the marketing, operation, maintenance, and day-to-day financing of rental properties.

• ✓Involves marketing, operation, and maintenance of rentals
• ✓Includes day-to-day financing of rental properties

Quiet enjoyment is the right of an owner or tenant to use property without interference of possession. A notice to quit is a notice to a tenant to vacate rented property.

• ✓Quiet enjoyment protects use without interference of possession
• ✓Notice to quit requires the tenant to vacate

Trade fixtures are personal property annexed by a business tenant that are necessary to the trade and removable by the tenant. Waste is the destruction, material alteration, or injury to premises by a tenant.

• ✓Trade fixtures are removable by the business tenant
• ✓Waste is destruction or injury to premises by a tenant

The vacancy factor is the percentage of a building's space that is not rented over a given period, important in income property valuation and management.

• ✓Vacancy factor measures unrented space over a period
• ✓Expressed as a percentage of building space

A PRLS is in the business of supplying prospective tenants with listings of residential rental property while collecting a fee at the same time or in advance of providing the listings. A PRLS does not negotiate rental or lease agreements. Sections 10167-10167.17 and Regulations 2850-2853 govern this activity.

• ✓A PRLS supplies rental listings while collecting a fee at the same time or in advance
• ✓A PRLS does not negotiate rental or lease agreements
• ✓PRLS is governed by Sections 10167-10167.17 and Regulations 2850-2853

A broker may use non-columnar records if they comply with GAAP, include the detail in subdivision (a) of the regulations, and allow tracing/reconciliation per Section 2831.2. These consist of a journal, cash ledger, and beneficiary ledger.

• ✓A journal records all trust fund transactions chronologically and must show total receipts/disbursements at least monthly
• ✓A cash ledger shows bank balance changes (debits/credits); a beneficiary ledger tracks each beneficiary's transactions and balance
• ✓There must be one set of journal, cash ledger, and beneficiary ledger for each trust fund bank account

To terminate on default, the landlord must serve written notice specifying that within three days the tenant must comply (if curable) or vacate and surrender. This is a prerequisite to filing unlawful detainer. Delivery of the notice does not automatically terminate the lease.

• ✓A three-day notice to cure or quit is a prerequisite to unlawful detainer
• ✓The notice must give the option to cure only if the breach is curable
• ✓Serving the notice does not automatically terminate the lease

If leased property is condemned by eminent domain, the tenant is ordinarily released from all obligations including rent. If only partially taken and the remaining portion is still usable for its purpose, the tenant must continue paying rent under the lease.

• ✓Full condemnation releases the tenant from all obligations including rent
• ✓Partial condemnation with usable remainder requires continued rent payment

The notice may be served by: (1) personal delivery on the tenant; (2) substituted service - leaving a copy with a person of suitable age at the residence/business AND mailing a copy - if the tenant is absent; or (3) 'nail and mail' - posting conspicuously, delivering to the occupant, and mailing - if the address cannot be ascertained or no suitable person is found.

• ✓Personal delivery is the primary method of service
• ✓Substituted service requires leaving a copy plus mailing
• ✓Nail-and-mail is a last resort when the tenant cannot otherwise be served

A refinance loan replaces an existing loan for borrowers holding title.

• ✓Refinancing obtains better rates/terms, may extend cash-out credit, or substitute a different loan type
• ✓Refinancing can convert a purchase-money mortgage to a non-purchase money mortgage, creating personal liability and possible deficiency judgment

A purchase loan finances a portion of the property's purchase price; occupancy status affects available products.

• ✓Owner-occupied conventional purchase loans typically require a 5 to 25% down payment; larger down payments improve rates and terms
• ✓Down payments and LTV over 80% generally require mortgage insurance; FHA insured and VA indemnified loans are common

No creditor, mortgage broker, or their affiliate may directly or indirectly coerce, influence, or encourage an appraiser to misstate or misrepresent a dwelling's value. Violations include implying retention depends on valuation, excluding an appraiser for low values, telling a minimum value needed, failing to pay for insufficient values, or conditioning fees on loan consummation.

• ✓No coercing, influencing, or encouraging appraisers to misstate dwelling value
• ✓Prohibited: implying retention depends on value, telling minimum value needed, or conditioning fees on consummation
• ✓A creditor who knows of an appraisal violation may not extend credit based on that appraisal without reasonable diligence

Effective 10/1/2009, 'mortgage broker' means a person (other than a creditor's employee) who, for compensation or expectation of it, arranges, negotiates, or obtains an extension of consumer credit for another. It includes persons to whom the obligation is initially payable unless they fund the transaction from their own resources, deposits held, or a bona fide independent warehouse line of credit.

• ✓Mortgage broker = non-employee who for compensation arranges/negotiates/obtains consumer credit for another
• ✓Includes persons the obligation is initially payable to unless they fund from own resources/deposits/warehouse line
• ✓Definition applies under amended 12 CFR 226.36

Actions that do NOT violate the rule include asking an appraiser to consider additional information, requesting the basis for a valuation, requesting correction of factual errors, obtaining multiple appraisals under a most-reliable selection policy, withholding compensation for breach/substandard performance, and taking action required by law.

• ✓Permissible: requesting additional information, valuation basis, or correction of factual errors
• ✓Permissible: obtaining multiple appraisals under a most-reliable (not highest-value) selection policy
• ✓Permissible: withholding pay for breach/substandard work and taking legally required action

A servicer of a principal-dwelling loan must not: fail to credit a payment as of the receipt date (with limited exceptions); impose a late/delinquency fee when the only delinquency stems from prior late fees on an otherwise timely full payment (pyramiding); or fail to timely provide an accurate payoff statement. If a servicer accepts a non-conforming payment, it must be credited within 5 days of receipt.

• ✓Payments must be credited as of the date of receipt (with limited exceptions)
• ✓No pyramiding of late fees where the only delinquency is prior late fees on an otherwise full, timely payment
• ✓Must provide an accurate payoff statement within a reasonable time; non-conforming payments credited within 5 days