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

SALT Tax Deductions

Politicians in mostly Democratic high-tax areas say the new federal cap on state and local tax deductions hurts their residents. Yet the vast majority of those taxpayers never actually got the break in the first place, undermining a key criticism of the Trump tax overhaul.

About three-quarters of people who in past years paid more than $10,000 in state and local taxes had been required to take the alternative minimum tax, meaning they couldn’t have written off the SALT levies anyway, according to IRS data analyzed by Bloomberg. And because the AMT has been scaled back as well, those top earners in fact get a new tax break by now being able to write off up to $10,000 of their SALT payments.

Bloomberg analyzed IRS data from 10 of the wealthiest counties in the U.S. — including New York’s Westchester, New Jersey’s Somerset, Connecticut’s Fairfield and California’s Marin counties.

The numbers could deflate some of the heated rhetoric over the 2017 tax overhaul, the Republican Party’s signature legislation of the Trump era. Since the law was enacted, governors and lawmakers from high-tax states have decried the change as a GOP assault on Democratic strongholds. New York Governor Andrew Cuomo called it an “economic civil war.”

“A lot of folks are coming in assuming they’re going to lose under the new tax law when in fact, they’re not,” said Ryan C. Sheppard, an accountant at Knight Rolleri Sheppard in Fairfield, Connecticut. “In many cases they’re doing better because in prior years the alternative minimum tax disallowed all their state and local tax deductions. Now they’re at least getting $10,000, where they got zero before.”

Link to Article

Tax Changes?

The tax system will be under assault from now on – from the NYT:

A majority of Americans are increasingly open to raising taxes on the wealthy. Lawmakers like Representative Alexandria Ocasio-Cortez and Senator Bernie Sanders have proposed revolutionary ways of reducing wealth inequality.

There are other ways of bridging the gap — ways that stand a chance of becoming law. Here are some examples:

1. Change the estate tax. None of the suggestions in this column can work unless the estate tax is rid of the loopholes that allow wealthy Americans to blatantly (and legally) skirt taxes.

Without addressing whether the $11.2 million exemption is too high — and it is — the estate tax is riddled with problems. Chief among them: Wealthy Americans can pass much of their riches to their heirs without paying taxes on capital gains — ever. According to the Center on Budget and Policy Priorities, unrealized capital gains account for“as much as about 55 percent for estates worth more than $100 million.”

That’s because after someone dies, the rules allow assets to be passed on at their current — or “stepped up” — value, with no tax paid on the gains. An asset could rise in value for decades without being subject to a tax.

Gary Cohn, the former White House economic adviser, once said, “Only morons pay the estate tax.” One solution: taxing inherited property at its current worth to capture gains in value made over decades. According to the Congressional Budget Office, closing this loophole could raise more than $650 billion over a decade.

2. Raise capital gains rates for the wealthy. Andrew suggests introducing two new tax brackets — say, a marginal 30 percent bracket for those earning over $5 million and a 35 percent bracket for over $15 million — so the U.S. could raise money without discouraging investment.

Most of America wouldn’t be affected at all and those wealthy individuals who are successful enough to pay more would be unlikely to hold back on investment. After all, they’d still want to get a return on their money rather than have it sit idle.

Even Bill Gates agrees, telling CNN: “The big fortunes, if your goal is to go after those, you have to take the capital gains tax, which is far lower at like 20 percent, and increase that.”

3. Close the carried-interest loophole. Current tax law allows executives at investment firms to have bonuses taxed as capital gains, not ordinary income. Scrapping that — an idea that President Trump has supported — has clear appeal to Americans’ basic sense of fairness.

4. 1031 Exchanges. One reason there are so many real estate billionaires is the law allows the industry to perpetually defer capital gains on properties by trading one for another. In addition, real estate industry executives can depreciate the value of their investment for tax purposes even when the actual value of the property appreciates. (This partly explains Mr. Kushner’s low tax bill.) These are glaring loopholes that are illogical unless you are a beneficiary of them. Several real estate veterans I spoke to privately acknowledged the tax breaks are unconscionable.

5. Reconsider breaks for charitable giving. At a minimum, Andrew writes, “we ought to consider whether the wealthy should be allowed to take deductions when they move money to their own foundations, or whether they should only take a deduction when the money is spent.”

6. Support the I.R.S. “The agency is so underfunded that the chance an individual gets audited is minuscule,” Andrew writes.

Mary Kay Foss, a C.P.A. in Walnut Creek, Calif., told the trade magazine Accounting Today what we all know, but is inexplicably never say aloud: “No business would cut the budget of the people who collect what’s owed.”

“It encourages people to cheat,” she said. “We need a well-trained, well-paid I.R.S. staff so that those of us who pay our taxes aren’t being made fools of.”

Link to Article

Prop 13 Changes?

The next election is 20 months away, but the discussion over Prop 13 is already heating up.  It appears the fight is shaping up to be teachers vs. old guard.

Excerpted from the LAT:

That is where the California Schools and Local Communities Funding Act comes in.

Proposition 13 limits property taxes for homes and businesses to 1% of their taxable value. It also prohibits that taxable value from rising more than 2% each year, no matter how much a property’s market value rises. The longer a person or business owns a piece of property, the less they pay in taxes compared with market value.

What the new ballot measure would do is strip that protection from commercial and industrial properties while leaving residential properties untouched. Its proponents estimate that the measure would bring in $11 billion each year to be split among K-12 education, community colleges and local government bodies.

How much would that bring in to primary and secondary schools in Los Angeles County? An estimated $1.375 billion each year.

Veronica Carrizales is policy and campaign director for California Calls, a statewide alliance of community organizations that is pushing for the new measure, which is also known as “split-roll.” Like many analysts, she argues that the origins of the recently ended strike go back to Proposition 13.

The 1978 measure “caused massive disinvestment of local government and public education,” she said. “It did this by creating a loophole for large commercial and industrial corporations that have essentially avoided paying their fair share.”

Jon Coupal, president of the Howard Jarvis Taxpayers Assn., calls that “an urban myth.” His organization is behind Proposition 13 and plans an expensive and vigorous campaign to beat back any changes to it.

If the ballot measure passes, Coupal said, “citizen taxpayers … will end up paying more for the goods and services they buy,” and L.A. Unified will be no better off.

“This school district is the nation’s poster child for mismanagement,” he said.

Joshua Pechthalt, president of the California Federation of Teachers, said the $5 billion or so that will flow toward education if the new ballot measure passes is a significant amount of money.

“But I don’t think it’s enough money,” he said. “I think other things will have to be done to move California and LAUSD into one of the top states in the nation in terms of per-pupil spending and class size.”

It’s unlikely that the middle class is going to feel sorry for the owners of commercial and industrial real estate, and more strikes by teachers should help convince voters to change Prop 13 – especially those who weren’t around in 1978.  We know that the elimination of tax-basis inheritance by kids and grandkids will be included in the initiative, but what else?  This will be the chance to slip in other changes – let’s keep an eye on it!

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