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Equity Rich

Doubling in eight years, the number of local homeowners who have at least 50% equity is impressive.

Those who are 55+ and anxious to take their property-tax basis with them to their new home can feel free to list their existing home for sale NOW, and close after April 1st to qualify!

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Prop 19 Answers

Jordan works for the county and answered questions about Prop 19 in this interview here:

https://www.facebook.com/SanDiegoUnionTribune/videos/4210256878986440

A few highlights:

If you transfer ownership to your kids by February 15th through a grantor trust or irrevocable trust, then they won’t be impacted when the new rule takes effect. Ask about your IRS step-up in basis though.

The county recorder’s office is closed on February 15th.

The county recorder’s office is closed for over-the-counter work due to the pandemic.

If you notarize your document by February 15th, they will accept it as long as you record it at the county recorder’s office within three years.

Call his cell phone during normal hours (his wife is a divorce attorney).

Link to 40-minute Interview

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Prop 19 – Will Trust Protect Reassessment?

Prop. 19 will reduce or eliminate some generous tax breaks that families get when property is transferred between parents and children. But it won’t change the rules for trusts themselves.

Some transfers are exempt from reassessment. Transfers between spouses are always exempt.

Another exclusion applies to transfers between parents and children, and between grandparents and grandchildren if the parents are not alive. For simplicity, we’ll assume here the transfer is from parents to children, but it also works in reverse.

Under current law, parents can transfer — by sale, gift or inheritance — their primary residence to their children and it won’t be reassessed, no matter how much it’s worth or how the kids use it.

In addition to a primary home, each parent can transfer “other property” — such as a vacation home, rental or commercial property — and exempt up to $1 million in assessed value (not market value).

Prop. 19 changes these rules on parent transfers that take place after Feb. 15 in the following ways:

  • It abolishes the exemption on “other property.”
  • It preserves the exemption on primary residences, but only if the child also uses the home as a primary residence and to the extent the difference between the home’s assessed value and market value does not exceed $1 million (indexed for inflation)
  • If it does exceed $1 million, it will be partially reassessed, but not to full market value. If the child does not use the home as a primary residence, it will be reassessed at market value.

Prop. 19 is not retroactive and won’t apply to any property until it is transferred (or deemed transferred) after Feb. 15.

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Prop 19 Passes

The key components of Prop 19:

Now, older homeowners (55+) can take their old property-tax basis with them when they buy a more expensive home anywhere in the state — up to three times. Homeowners with disabilities will be able to do the same, plus victims of wildfires and other natural disasters and hazardous waste contamination will be able to do so after their home is damaged.

The number of times that a tax assessment can be transferred increased from one to three for persons over 55 years old or with severe disabilities (disaster and contamination victims would continue to be allowed one transfer).

If they pay equal or less in price, the property-tax basis from their previous home transfers.

If they buy up in price, the difference between sales price of old home and purchase price of new home is added to the tax basis (pay full tax on the difference).

New residence must be purchased within two years of the sale of the previous residence.

The measure goes into effect on April 1, 2021.

In California, parents or grandparents could transfer primary residential properties to their children (or grandchildren if all parents are deceased) without the property’s tax assessment resetting to market value. Other types of properties, such as vacation homes and business properties, could also be transferred from parent to child or grandparent to grandchild with the first $1 million exempt from re-assessment when transferred. The ballot measure eliminates the parent-to-child and grandparent-to-grandchild exemption in cases where the child or grandchild does not use the inherited property as their principal residence, such as using a property as a rental house or a second home. When the inherited property is used as the recipient’s principal residence but is sold for $1 million more than the property’s taxable value, an upward adjustment in assessed value would occur. The ballot measure also applied these rules to certain farms. Beginning on February 16, 2023, the $1 million amount would be adjusted each year at a rate equal to the change in the California House Price Index.

https://elections.cdn.sos.ca.gov/ballot-measures/pdf/aca11.pdf

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Real estate interests raised more than $39 million to support Proposition 19’s passage. Realtors are expected to benefit from increased home sales, both by older homeowners deciding to take advantage of their new tax benefits to move and heirs preferring to sell their parents’ properties rather than pay higher property taxes.

Much of the Realtor-backed campaign for Proposition 19 focused on benefits to wildfire victims and increased funding for wildfire response. But disaster-affected homeowners constitute well under 1% of those eligible for tax relief under Proposition 19, according to an analysis by the California Budget and Policy Center, which found the benefits mostly accruing to older white homeowners.

And while the measure does reserve new tax revenue for wildfire response, the state’s nonpartisan Legislative Analyst’s Office believes that the vast majority of the wildfire funding will not start flowing until 2025 at the earliest.

Proposition 13 Tax Transfer Initiative

The Proposition 13 Tax Transfer Initiative will be on the ballot in November.  If passed, it will give those 55 and older the ability to take their old property-tax basis with them, no matter (a) the new home’s market value; (b) the new home’s location in the state; or (c) the buyer’s number of moves.  But the tax basis will be subject to a re-calculation, depending if the new home is more or less expensive.

The California Association of Realtors is also pursuing a legislative alternative that will eliminate intergenerational transfers of primary residences and other inherited property being used for income-producing purposes without reassessment.

The kids and grandkids have enjoyed taking over their elders’ homes – and their typically ultra-low tax basis that transferred.  The state legislature could change that in August, which would bring in additional revenue to compensate for those seniors taking their old tax basis with them.

Click on Read More below for details:

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Boomer Parents-to-Children Transfers

Daytrip sent in this article (link below) on baby boomer sales, and how the transfer of homes from parents to children are likely to dampen the supply of homes for sale – and somewhat limit the property-tax receipts:

LATimes.com

But then I went to the actual report for more info and graphs:

http://www.lao.ca.gov/Publications/Report/3693

They do expect more boomer sales – it looks like a growing trend as more boomers get into their mid-70s:

Home Sales Likely to Pick Up as Homeowners Get Older. Although the aging of California’s homeowners has depressed home sales in past years, this pattern is likely to reverse in the future.

As California’s homeowners continue to age—transitioning from the 55 to 75 age group to the over 75 age group—more and more will begin to downsize, move into assisted living or with family, or die. When this occurs, home sales are likely to rise.

Between 2003 and 2013, over two-thirds of homes in California with owners 75 or older were sold to a new owner, compared to less than one-third of homes with owners ages 55 to 75.

Different Rules Apply to Homes Passed From Parents to Children. In general, when a home is transferred to a new owner, its taxable value is reset to its purchase price.

California voters, however, passed Proposition 58 in 1986, which amended the California Constitution to exempt transfers between parents and children (and later grandparents and grandchildren under certain circumstances under Proposition 193 [1996]) from revaluation. This allows a child to inherit their parent’s lower taxable property value.

The report shows the parent-to-child transfers to be around 10% over the total homes sales over the last decade, but it should be going higher, especially in the higher-cost coastal counties!

Parent-to-Child Exclusions Have Had a Notable Impact on Revenues. Over the past decade, around 10 percent of property transfers have taken advantage of the parent-to-child exclusion to prevent an increase in property tax payments. Figure 6 shows how many of these exclusions have been used each year during the past decade.

JtR:

San Diego County is the second most populated county in the state, so no surprise we’re #2 on list at $133,000,000 in estimated reduced taxes.  Those are a substantial number of homes being transferred within the family!

If the average tax savings was $10,000 per house sold, it would mean 13,300 homes transferred from parent to child – and this is from 2014-2015.  We had 35,382 homes sold on the MLS in the same period.  Add the FSBOs and new-home sales and we might have had 40,000 to 45,000 total homes transferred in fiscal 2014-2015.

The parent-to-child transfers could be as many as 25% of the homes moved! (40,000+13,300 = 53,300.  13,300/53,300 = 25%)

Their $133,000,000 estimate could be a tad off, but we probably have 10% to 20% of the potential supply of homes for sale being transferred within the family.  No wonder the public supply is so limited.

It is a trend that probably started to increase in 2013 as prices took off.  Parents realized that with the low tax basis, a child would be better off moving into the family homestead, rather than buying a resale home and paying full boat on the property taxes!

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Policy on Raising Property Taxes

Once home values started declining, the San Diego County tax assessor started revising downward the assessed values of properties bought during the peak era.

Many were a results of requests made by homeowners, but the assessor’s staff also revised some voluntarily.  Now that it appears that the market has bottomed, are the tax-assessed values being raised?

A generous reader offered the following:

The properties that were not re-assessed downward under (the other) Prop 8 continue to creep up every year by either 2% or California CPI, whichever is lower. That’s basically every home bought prior to the bubble, and they only got a break when CCPI was negative for the first time since Prop 13 and every property got a shave.

Those that were adjusted downward under Prop 8 are re-evaluated every year and can jump up to whatever the tax assessor says they are worth until they get restored to their original assessed value plus annual increase (which they also track). When those properties get back to where they would have otherwise been but for the recession, then they increase annually like all other properties.

The Assessor says they are cautiously restoring AV on those that his office reset because they don’t want to fight appeals and in many areas they just don’t have sufficient volume of comps to justify higher AV yet.

Glad to hear that the tax assessor is ‘cautiously restoring’.

Property-Tax Reassessment

From the City News Service – seen at Encinitas Patch:

The deadline to ask for a property value reassessment is April 30th, San Diego County Assessor Ernie Dronenberg noted Monday.

Property owners who believe the value of their holdings has dropped below the current assessment can have the county conduct a review by applying online:

http://arcc.co.san-diego.ca.us/services/prop8/prop8.aspx

Those without online access can call (858) 505-6262 and have a form mailed, but they need to act quickly, Dronenberg said.

He said the form is self-explanatory and does not require legal knowledge.

More than 200,000 taxpayers were granted a reduction in assessed value last year, he said. They do not need to re-apply because their property value will be reviewed automatically.  Property owners who disagree with their reassessment are allowed to file an appeal.

The deadline gives county staff time to conduct the review before the 2012-13 property tax bills are mailed out.

(You are required to include recent comparable sales – I’m happy to help!)

Mello-Roos Not Tax-Deductible

Hat tip to ProfHoff for sending in this update from sfgate.com:

Many California homeowners may be surprised to learn that some charges on their property tax bills are not deductible on their income tax return.

The Franchise Tax Board is on a mission to get California homeowners to follow the law and stop deducting the entire amount of their property tax payment. Increasing compliance would raise money for the state and federal government.

(Reminder: California homeowners must pay the first half of their 2011-12 property tax payment by Dec. 10 to avoid penalties.)

Tax pros say the vast majority of homeowners deduct their entire property tax payment as an itemized deduction on their federal tax return, even though federal law prohibits deducting certain taxes and fees. Taking the full deduction reduces state as well as federal taxes.

To be deductible, a property tax must be a percentage of the home’s assessed value (known as an ad valorem tax). It also must be imposed uniformly throughout the community and benefit the general community or government.

Any tax that is a flat fee per household or an itemized charge for services assessed against specific property or certain people is not deductible. Nondeductible charges might be identified as Mello-Roos or Community Facilities Districts, 1915 assessment district bonds, lighting and landscape, parcel taxes, school or college measures and bonds, water, sewer, flood, police, fire and libraries, the tax board says on its website.

Property tax bills do not break out which charges are and are not deductible. In many cases, it’s hard to even decipher what the charges are.

Nevertheless, the tax board told tax preparers in September that it was going to add three lines to 2011 California income tax returns asking homeowners for their parcel number, the amount of property taxes paid and the nondeductible amount.

After getting many complaints from the tax community, the board decided in mid-November to postpone these changes until 2012 tax returns and in the meantime try to educate homeowners about the issue.

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Commercial Prop 13

From the U-T:

SACRAMENTO, Calif. — Democratic lawmakers are determined to close tax loopholes they say cost state and local governments hundreds of millions of dollars each year, as they search for ways to trim California’s enormous deficit.

A report by the union-funded California Tax Reform Association found that the share of property tax paid on residential property has increased since two-thirds of voters approved California’s landmark Proposition 13 tax law in 1978, while the share paid on commercial property has decreased.

In Contra Costa County, for example, taxes on residential properties now make up 73 percent of property taxes collected, up from 48 percent in 1978.

Democrats and unions say many corporations are using loopholes when they buy and sell properties to avoid having them reassessed and their property taxes go up.

“The system is an incredible mess,” said the association’s executive director, Lenny Goldberg. “People are constantly changing their share of ownerships, figuring out ways to avoid reassessment.”

Republicans strongly oppose efforts to tinker with the system. They see such moves as an effort to undermine Proposition 13, the initiative that capped property tax increases and remains popular with voters.

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