Family Home Protection and Fairness in Property Tax

The California Association of Realtors president sent this letter out today with different verbiage about the reassessment of commercial properties – the way it sounds in her letter (in italics below) makes it sound different than what’s been widely published. I can’t find any changes to the original measure, excerpted here:

The measure requires commercial and industrial properties, as well as vacant land not intended for housing, commercial agriculture, or protected open space to be taxed based on their market value, as opposed to their purchase price. A property’s market value is what it could be sold for today. The measure’s shift to market value assessment is phased in over a number of years beginning in 2022-23. For properties in which the majority of space is occupied by small businesses—defined as businesses that own California property and have 50 or fewer employees—the shift to market value taxation would not begin until 2025-26 or a later date set by the Legislature.

Properties owned by individuals or businesses whose property holdings in the state total less than $3 million (adjusted for inflation biannually beginning in 2025) are exempt from market value taxation. These properties would continue to be taxed based on purchase price. Similarly, residential properties would continue to be taxed based on purchase price.

May 6, 2020

Dear Jim,

During this COVID-19 pandemic, we are facing some of the biggest challenges in a generation, experiencing severe stress and uncertainty with our businesses, our families and our way of life. Our daily lives have changed overnight, and as we prepare to transition to a new normal, we, at C.A.R., are focused on addressing our members’ most immediate needs and advancing policies that will strengthen economic recovery and the housing market, supporting REALTORS®, our clients and our communities.

I am writing today to share the news that after collecting and submitting nearly 1.5 million signatures, C.A.R.’s ballot initiative has recently qualified for the November 2020 ballot — and at our C.A.R. Board of Directors meetings last week, the Board overwhelmingly voted to lead the campaign effort to win passage of The Family Home Protection and Fairness in Property Tax initiative in the upcoming election.

The Family Home Protection and Fairness in Property Tax initiative is needed now more than ever and is key to a California Housing Market Economic Recovery. Prior to the COVID-19 pandemic that changed the way we work and live, C.A.R.’s actions placed us in the position we are in today to support this initiative: providing housing relief for millions of seniors, improving homeownership opportunities throughout the state, and generating needed revenues for local school districts, cities and counties to help fill budget deficits and critical funding for schools, public safety, healthcare and homeless services, local housing projects and more.

In April 2019, C.A.R.’s Board of Directors supported the first official step in the initiative process by submitting it to the Attorney General. Then in October 2019, the Board of Directors supported funding the qualification and signature collection to place this initiative on the ballot. The campaign’s efforts resulted in submitting a record number of signatures in time for the November ballot — qualifying the measure under budget, with over $1 million in cost-savings.

This initiative is a win-win for everyone — creating relief for seniors and victims of wildfires, homeownership opportunities throughout the state and needed revenue for local government and school districts at a time when they need it most.

Key Provisions: 

Benefits Homeowners, Seniors, People with Disabilities and Natural Disaster Victims

This initiative removes unfair location and price restrictions, so that homeowners 55 years or older, people with severe disabilities, and victims of wildfires or natural disasters can transfer their existing property tax base to a replacement home anywhere in California. Without this change, many have felt trapped in their homes and could not afford to move closer to their families or health care facilities. This eliminates hurdles for homeowners, including those in our most vulnerable population at this most critical time.

Constitutionally Protects Family Homes

The initiative protects the right of parents and grandparents to pass the family home on to their children, so they can afford to live in the home. This family home tax savings, termed a “special rule” in the State Legislature, has been targeted by the media and by state legislators for removal. This initiative safeguards family homes as intended under Proposition 58 and Proposition 193.

Benefits Local Communities and Schools

This initiative provides long-term benefits for local municipalities and schools, generating hundreds of millions of dollars to help fund public safety, hospitals, health care services, homeless programs and local housing projects. The initiative does not raise or change tax rates, it simply defines events that may trigger future limited assessments. For example, the initiative requires disclosure and reporting of corporate ownership changes and reassessment of business property resulting from certain ownership changes — which will generate over $269 million per year, according to the California Board of Equalization. This modest reform is even backed by business groups.

We are supporting this initiative because we believe it is a policy that the housing market desperately needs for economic recovery, addressing the housing needs of millions of Californians, while providing revenue for schools and local communities. This is why recent polling conducted this past month confirms consistent voter support across the state for the initiative’s provisions.

As California transitions to a new normal, this initiative has come at an important moment. It will help ease housing affordability and accessibility for Californians, stimulate the housing market and provide funding for our local municipalities and schools.

I am proud to announce C.A.R.’s full support of The Family Home Protection and Fairness in Property Tax initiative and hope you will join me in helping to win its passage in November.

Sincerely,

Jeanne Radsick
C.A.R. President

Tax-Filing Relief

Image result for uncle sam irs

Federal: Congress is working through several fiscal policy proposals. It is very likely that whatever relief is passed will include tax incentives that will need to be carefully planned for.

The Treasury and IRS announced on March 17 that the tax deadline will be extended 90 days, to July 15, and the IRS will waive interest and penalties for certain taxpayers. The delay is available to people who owe $1 million or less and corporations that owe $10 million or less.

California: The state has granted extensions to individual filers, partnerships and LLCs and quarterly estimated tax payments: Filing and payment is due June 15. The Employment Development Department and California Department of Tax and Fee Administration have also released guidelines.

SALT & Migration

Excerpts from the latimes article:

Ever since the SALT cap went into effect in 2018, the hunt has been on for signs that it has prompted more wealthy residents to move from high-tax to low-tax states.

“Despite some recent claims that it has,” Lucy Dadayan of the Tax Policy Center wrote on Feb. 10, “the data available support the view that ‘We don’t have any idea.’”

News articles crop up from time to time about things like surging purchaser interest in Florida condos from residents from New York or California. But they’re anecdotal, not data-driven. It’s hard to say whether the interest doesn’t reflect the pretax bill trend or bargains left over from a lengthy Florida real estate slump.

“Migration has been a problem for a number of years,” Dadayan told me. “SALT cap or not, New York has to be concerned about losing people.” Internal Revenue Service statistics show that New York lost more than 76,000 taxpayers from 2017 to 2018, nearly 1% of its taxpayers and the largest outflow among high-population states.

But as Dadayan observes, attributing that migration to concerns about high taxes in general or the SALT cap specifically is another matter. The top destination for fleeing New Yorkers in recent years has been California, which has a higher top income tax rate. “Migration is not necessarily determined by taxes,” she says.

The SALT cap raised hackles in high-tax states. New York Gov. Andrew Cuomo pronounced it “an economic civil war that helps red states at the expense of blue states.”

Pinpointing the relationship between the SALT cap and interstate migration is difficult for several reasons. One is that it’s too early to tell. The Internal Revenue Service has released taxpayer data only through the 2017 tax year; statistics for 2018 tax payments won’t be available until December.

(more…)

Widowed Sellers and Taxes

Widowed taxpayers.

If you are a widowed taxpayer who doesn’t meet the 2-year ownership and residence requirements on your own, consider the following rule. If you sell your home within 2 years of the death of your spouse and you haven’t remarried at the time of the sale, then you may include any time when your late spouse owned and lived in the home, even if without you, to meet the ownership and residence requirements.

Also, you may be able to increase your exclusion amount from $250,000 to $500,000. You may take the higher exclusion if you meet all of the following conditions.

  1. You sell your home within 2 years of the death of your spouse;
  2. You haven’t remarried at the time of the sale;
  3. Neither you nor your late spouse took the exclusion on another home sold less than 2 years before the date of the current home sale; and
  4. You meet the 2-year ownership and residence requirements (including your late spouse’s times of ownership and residence if need be).

https://www.irs.gov/publications/p523

Taxation on Inherited Property

When you drive around older neighborhoods, you see homes in original condition or in a state of disrepair, which are signs of senior homeowners. It makes you think, “They should sell and move – are they just waiting around to die?”

The answer is YES, and it’s because of how the IRS taxes the gain from the sale of your home. Once a property is inherited, the tax basis is stepped up to fair-market value.

Excerpted from the IRS website:

Inherited Property

The basis of property inherited from a decedent is generally one of the following.

  • The FMV of the property at the date of the individual’s death.
  • The FMV on the alternate valuation date if the personal representative for the estate chooses to use alternate valuation. For information on the alternate valuation date, see the Instructions for Form 706.
  • The value under the special-use valuation method for real property used in farming or a closely held business if chosen for estate tax purposes. This method is discussed later.
  • The decedent’s adjusted basis in land to the extent of the value excluded from the decedent’s taxable estate as a qualified conservation easement. For information on a qualified conservation easement, see the Instructions for Form 706.

If a federal estate tax return doesn’t have to be filed, your basis in the inherited property is its appraised value at the date of death for state inheritance or transmission taxes.

For more information, see the Instructions for Form 706.

Appreciated property.

The above rule doesn’t apply to appreciated property you receive from a decedent if you or your spouse originally gave the property to the decedent within 1 year before the decedent’s death. Your basis in this property is the same as the decedent’s adjusted basis in the property immediately before his or her death, rather than its FMV. Appreciated property is any property whose FMV on the day it was given to the decedent is more than its adjusted basis.

Community Property

In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), married individuals are each usually considered to own half the community property. When either spouse dies, the total value of the community property, even the part belonging to the surviving spouse, generally becomes the basis of the entire property. For this rule to apply, at least half the value of the community property interest must be includible in the decedent’s gross estate, whether or not the estate must file a return.

For example, you and your spouse owned community property that had a basis of $80,000. When your spouse died, half the FMV of the community interest was includible in your spouse’s estate. The FMV of the community interest was $100,000. The basis of your half of the property after the death of your spouse is $50,000 (half of the $100,000 FMV). The basis of the other half to your spouse’s heirs is also $50,000.

For more information on community property, see Pub. 555, Community Property.

https://www.irs.gov/publications/p551

Good-Bye MID?

Maybe having a mortgage is going out of fashion now that the affluent have taken over real estate? Or do we just need to Get Good Help with filing taxes? (30%-40% of Americans prepare their own taxes)

The mortgage-interest deduction, a beloved tax break bound tightly to the American dream of homeownership, once seemed politically invincible. Then it nearly vanished in middle-class neighborhoods across the country, and it appears that hardly anyone noticed.

In places like Plainfield, a southwestern outpost in the area known locally as Chicagoland, the housing market is humming. The people selling and buying homes do not seem to care much that President Trump’s signature tax overhaul effectively, although indirectly, vaporized a longtime source of government support for homeowners and housing prices.

The 2017 law nearly doubled the standard deduction — to $24,000 for a couple filing jointly — on federal income taxes, giving millions of households an incentive to stop claiming itemized deductions.

As a result, far fewer families — and, in particular, far fewer middle-class families — are claiming the itemized deduction for mortgage interest. In 2018, about one in five taxpayers claimed the deduction, Internal Revenue Service statistics show. This year, that number fell to less than one in 10. For families earning less than $100,000, the decline was even more stark.

The benefit, as it remains, is largely for high earners, and more limited than it once was: The 2017 law capped the maximum value of new mortgage debt eligible for the deduction at $750,000, down from $1 million. There has been no audible public outcry, prompting some people in Washington to propose scrapping the tax break entirely.

For decades, the mortgage-interest deduction has been alternately hailed as a linchpin of support for homeownership (by the real estate industry) and reviled as a symbol of tax policy gone awry (by economists). What pretty much everyone agreed on, though, was that it was politically untouchable.

Nearly 30 million tax filers wrote off a collective $273 billion in mortgage interest in 2018. Repealing the deduction, the conventional wisdom presumed, would effectively mean raising taxes on millions of middle-class families spread across every congressional district. And if anyone were tempted to try, an army of real estate brokers, home builders and developers — and their lobbyists — were ready to rush to the deduction’s defense.

Now, critics of the deduction feel emboldened.

“The rejoinder was always, ‘Oh, but you’d never be able to get rid of the mortgage-interest deduction,’ but I certainly wouldn’t say never now,” said William G. Gale, an economist at the Brookings Institution and a former adviser to President George H.W. Bush. “It used to be that this was a middle-class birthright or something like that, but it’s kind of hard to argue that when only 8 percent of households are taking the deduction.”

Link to Full NYT Article

More Impact from Tax Reform

This is an additional breakdown of the TCJA showing how the married buyers of SD homes priced between $1,000,000 and $1,600,000 are losing a few hundred dollars.  It’s those above that who are taking a real hit.

There have been 253 NSDCC detached-home sales in the first five months of 2019, which is 6% more than the 238 between January and May of last year.

I did ask the authors if they included the AMT – no response yet.

Link to article:

Link to JBREC Article

Tax Reform Winners and Losers

The folks at JBREC have completed their own tax-reform study:

Link to Article

They say the high-earners who buy a million-dollar house are the losers, but those folks can still deduct the roughly $30,000 per year in mortgage-interest paid on a loan amount of $750,000 (though if they were renting previously they now have to pay property taxes).

Reasons for High-Earners to Buy a House:

  1. Deduct mortgage interest of $30,000 paid on your $750,000 loan (or higher).
  2. Secure where you are going to live over the next 5-50 years.
  3. Build equity with each payment.
  4. Gamble that the value will go up.
  5. Make the family happy.

Reasons for High-Earners Not to Buy a House:

  1. Have landlord pay property taxes, HOA, etc.
  2. Have landlord fix stuff.
  3. Stay flexible on where to live.
  4. Hope prices go down and buy later.

Numbers 1-4 on both lists probably offset each other, so the focus is on #5.

Impact of Fewer Deductions

Those who already own a home aren’t going to sell just because they have fewer deductions – where do you move?

Renters in high-priced areas are still motivated to buy so they get write-offs beyond the standard deduction.

Biggest impact? The sliver of the buy-up market who already has a mortgage between $750,000-$1,000,000 and now gets fewer write-offs while paying more for their next house. Besides, how can you measure the exact impact – there are too many other variables to consider.

More than a year after the 2017 Tax Cuts and Jobs Act reduced tax breaks for homeowners, only the wealthiest Americans are suffering, according to a new report.

The real estate industry was concerned about the impact of two items in the 186-page law: limiting the mortgage-interest deduction to $750,000, down from $1 million, and capping the deductibility of property taxes to $10,000. So far, the only casualty has been the priciest end of the luxury market in some of the wealthiest U.S. towns, according to a report Monday from First American.

“At a macro-level, the tax changes have had virtually no impact to the housing market,” Deputy Chief Economist Odeta Kushi wrote in the report. “What we know 16 months into the change is that the highest price points of some of the highest-priced housing markets may suffer as real estate is re-priced to reflect the change in the cost of owning.”

The cap on state and local taxes, known as SALT, has not impacted the housing market nationally because it’s high enough that most homeowners are not affected, the report said. Median house prices have increased by about 5% since the law was enacted, according to First American data.

Economists expected to see the biggest impact in states such as California, New York and Connecticut, where both house prices and property taxes are high. However, statewide measures “have yet to see the anticipated impacts of the tax law materialize,” the report said.

“We must zoom in further geographically to see any meaningful impact on housing from the change in the tax law,” the report said. “Only once we zoomed in to the town level did signs emerge of any impact from the tax law change.”

In Eastchester, New York, about 20 miles north of Manhattan, the list price of homes in the highest-priced third of the market declined 12% in the year following the tax cuts while homes in the town’s bottom third increased 30% in the same period. There was a similar pattern in house prices in the Hamptons, on the eastern tip of New York’s Long Island, and other wealthy towns, the report said.

“The tax law may have reduced demand at the highest price points of high-cost markets, causing prices to fall,” the report said.

Link to Article

Prop 13 Change on 2020 Ballot

From the latimes:

Could a reassessment of Proposition 13 finally be in the wings?

Advocates of the long-needed change have their fingers crossed, now that a measure to revise Proposition 13 has qualified for the November 2020 ballot.

The initiative wouldn’t involve a wholesale review of the 1978 tax-cutting proposition; that’s still considered a politically impossible lift in a state where property tax breaks have become embedded in millions of homes and apartment buildings.

Instead, the measure takes aim at what long has been considered the Achilles’ heel of Proposition 13, namely its treatment of commercial and industrial properties. The idea is to create what’s known as a split roll, in which residences retain their imperviousness to reassessment but business properties don’t.

“My instincts tell me that the split roll is moving into more positive ground,” Los Angeles Assessor Jeffrey Prang told me, “and if next year there is a big Democratic turnout, that is likely to benefit the initiative.”

The proposal would require that commercial and industrial properties be assessed at full market value and reassessed at least once every three years. That’s a big change from the current law, which allows them to be reassessed only upon a change of ownership.

“That’s a ridiculous, outdated, irrational system which causes damage in many different ways,” says Lenny Goldberg, a veteran critic of Proposition 13 who helped craft the new initiative. “We have this huge hole in the heart of our tax system.”

He’s right. Thanks to Proposition 13, massively profitable commercial properties that haven’t changed hands in decades — Disneyland, say — are billed property taxes at 1970s-vintage assessed valuations while homes and businesses around them have much higher bases.

But here’s the punchline: As much as counties would appreciate the additional tax revenues, their assessors almost uniformly hate the initiative. That’s because it would saddle them with a workload that many say would be simply impossible to manage without years of preparation — far more than the three-year transition period implied by the initiative.

“I cannot implement the measure within three years,” Prang says. “It’s physically not possible.” The California Assessors Assn. agrees. It estimates the cost of the transition running as much as $470 million a year for up to 10 years — and individual assessors say that may understate the costs and challenges of making the change. These may be so great, they warn, that for many years they could exceed the additional tax revenues the change brings in.

Link to Full Article

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