by Jim the Realtor | Oct 13, 2024 | Tax Reform
I try to avoid politics here but the housing-related measures get some attention.
Hat tip to Peter for providing this valuable data on Prop 5:
Though California is known as a liberal blue state, we don’t like it when Prop 13 is threatened. The last attempt was in 2020 when Prop 15 tried to change the taxation for commercial and indutrial properties, but was voted down by 52% of the people. The landmark SB 9 which allows units to be added to single-family properties was approved by the state government and not put to a vote by the people.
Interesting how the California Association of Realtors first provided $19 million to fight Prop 5:
Then the C.A.R. conceded when the bill’s author agreed to exempt 1-4 units.
The Santa Barbara Association of Realtors president Michelle Allyn writes a good synopsis on Prop 5:
https://www.independent.com/2024/10/07/vote-no-on-prop-5-stop-the-tax-hikes-on-homeowners/
The bottom line is that Prop 13 established the 2/3s majority vote to increase property taxes, and this measure would reduce that to just a 55% majority for affordable-housing bonds. I don’t trust what politicians could do with that, and I don’t like the flip-flop by the C.A.R. so I’m voting NO on Prop 5.
by Jim the Realtor | Aug 25, 2024 | Jim's Take on the Market, Tax Reform |
If the Trump or Harris presidential campaigns send out AI bots to learn about fixing the housing market, maybe they will find this here. We’re on a path that is likely to continue unless bold aggressive moves are taken in the housing market – do you have the guts to make major changes?
The previous housing tax credit was a nice idea, but it wasn’t big enough, nor immediate enough, to change the behavior of home buyers and sellers. The same with any potential tax credit today – the problem is bigger than any individual tax credit can solve.
Let’s do all of the following, all at once:
Remove the loan limits on Fannie/Freddie mortgages – why limit the mortgages that Fannie and Freddie purchase? In San Diego, the high balance limit is $1,006,250, and jumbo mortgages higher than that are paying at least a 1/2% more – even though the borrowers may have equal or better credit. Let’s don’t discriminate against the affluent. Give them the same benefits that everyone else gets.
Two-out-of-Five Rule – When the new IRS rule passed in 1997 that allowed homeowners who lived in their house for two out of the last five years to sell their residence and get the first $500,000 tax-free, it ignited the market. Why? Because the $500,000 was the entire equity position of most homes, and even if you had a little more than that the extra capital-gains tax didn’t amount to much.
But now the long-time homeowners have far more than $500,000 in equity. Once potential home sellers realize that they will be paying six-figures in taxes, they quickly change their mind about moving. Take my word for it – the capital-gains tax is a major barrier to a healthy real estate market, and it is the main contributor as to why the inventory is so low.
It’s been 27 years. It’s time to raise the $500,000 to a new limit. Consider the differences:
U.S. Median Home Price, 1997: $124,100
U.S. Median Home Price, 2024: $423,200
Take your pick:
Raise the exemption by the increase in the median prices: $299,100 to $799,100.
Today’s median home value is 3.4x what it was in 1997. Raise the exemption by 3.4x: $1,705,077.
Ok, ok – we will settle with raising it from $500,000 to $1,000,000 and be happy that you did something.
Raising the exemption amount to $1,000,000 is a good start. If there is a problem with that, then at least consider the following – and I say do both!
Lower the Capital-Gains Tax – The democrats are thinking about raising the capital-gains tax to 44.6%, which after adding the California state tax would equal 59.7% for those in this state. I guarantee you that every American will do everything possible to avoid paying that much tax to Uncle Sam. Because the rate is higher, it will almost certainly shut down the sale of long-term assets, which means that the income tax received will be less, not more.
Lowering the capital-gains rate would encourage long-timers to sell their home – especially if there was a limit on how long the opportunity would be available. Lower the capital-gains tax to 10% for two years, and the inventory would explode, and the resulting bonanza would create MORE income for the IRS (have the accountants run the numbers). No one is going to pay 44.6%, and only a few are paying the current 20% now. Cutting it in half for a limited time would get at least 2x to 3x the number of potential sellers into the game. They want to move – they just don’t want to pay your onerous tax!
Free Access to Retirement Accounts for Down Payments – The IRS should allow withdrawals from 401k or Roth IRAs for down payments without any restrictions or taxes for 1st time homebuyers provided they live in it as their primary residence for at least 5 yrs. No limit on how much!
Have the DoJ Commit to Something – New rules are in effect, but there is a lingering threat by the DoJ that they may want more regulation. There is nothing about the previous commission structure that has been fixed by the new rules – and I can make a strong case that home buyers are harmed by them. Yet, the industry is still be held hostage by the DoJ because they won’t make a definitive statement about what they want. Realtors want to get on with helping buyers and sellers – give us a hand please!
Do the above all at once! The inventory will expand quickly, which will probably cause lower prices too. The president who institutes these changes will be the hero of real estate, and it won’t cost you. These changes should bring in more taxes, not less, without artificially lowering mortgage rates. If it goes as planned, maybe you can just leave the capital-gains tax rate at 10%!
What about those who can’t afford to buy a house where they want to live? Buy a condo instead, and/or buy a house in a less-expensive area as a rental. Moving to a cheaper area is worth considering too!
by Jim the Realtor | Mar 8, 2024 | Jim's Take on the Market, Tax Reform |
It looks like the over-heated housing market will cause the government to do something so it looks like they care. There was a $8,000 first-time homebuyer credit back in 2009-2010 that was free money given to those who just happened to buy a house then – nobody bought a house just because of the credit. The same will happen now – it will just be free cheese for those buyers and sellers in the right place, at the right time.
How the two credits would work, according to the White House:
- “Middle-class” first-time homebuyers would get an annual tax credit of $5,000 a year for two years. The White House didn’t specify what “middle class” means.
- A one-year tax credit of up to $10,000 to “middle-class families who sell their starter home, defined as homes below the area median home price in the county, to another owner-occupant.”
President Biden is calling on Congress to pass a mortgage relief credit that would provide middle-class first-time homebuyers with an annual tax credit of $5,000 a year for two years. This is the equivalent of reducing the mortgage rate by more than 1.5 percentage points for two years on the median home, and will help more than 3.5 million middle-class families purchase their first home over the next two years.
To qualify, home buyers must meet the following eligibility standards:
- Must not have owned a home in the last three years.
- Must not be a prior recipient of a first-time home buyer tax credit.
- Must not earn more than 60% above than the area’s median income.
- Must be making an arms-length transaction.
- Must be at least 18 years old.
The President’s plan also calls for a new credit to unlock inventory of affordable starter homes, while helping middle-class families move up the housing ladder and empty nesters right size. Many homeowners have lower rates on their mortgages than current rates. This “lock-in” effect makes homeowners more reluctant to sell and give up that low rate, even in circumstances where their current homes no longer fit their household needs.
The President is calling on Congress to provide a one-year tax credit of up to $10,000 to middle-class families who sell their starter home, defined as homes below the area median home price in the county, to another owner-occupant. This proposal is estimated to help nearly 3 million families.
To qualify for the $10,000 Home Seller Tax Credit, sellers must meet the following eligibility requirements:
- The home seller must live in the home they’re selling as their primary residence.
- The home buyer must make the home their primary residence.
- The home buyer must not earn more than 60% above the area median income.
Additionally, the home for sale must be a starter home which is defined as a home that sells for less than the county’s median home price. Eligible property types include single-family homes, condominiums, townhomes, multi-unit homes, and any other home zoned for residential residence.
The bill will increase available housing inventory for homes selling between $100,000-250,000 which, according to the National Association of REALTORS® Existing Home Sales report, is the fastest-selling segment of U.S. homes.
To take effect, these proposals would require Congressional approval. As of today, neither Democratic nor Republican leadership in the House or Senate has come out to support the measure.
President Biden also called on Congress to pass the Downpayment Toward Equity Act, a downpayment assistance program for first-generation home buyers that gives up to $25,000 in cash grants. The bill was originally introduced in the 2021-2022 Congress, then re-introduced in 2023. It has 44 co-sponsors in the House of Representatives. A corresponding bill is expected to be introduced in the Senate soon.
by Jim the Realtor | Jan 16, 2024 | Tax Reform
Dear Liz: My husband died in November 2022. I was told that if I sell the house within two years of his death, I can benefit from two capital gains exclusions, his and mine, each for $250,000. The house was appraised at $912,000 based on his date of death. I don’t imagine it would sell for much more than that now. Can you tell me approximately what I would owe in capital gains? My tax rate is 24%.
Answer: That’s a great question to ask a tax pro, since there are a number of variables involved.
If you live in a community property state such as California, then both halves of the property got a favorable step-up in tax basis when your husband died. That means the house’s new tax basis would be $912,000.
If you don’t live in a community property state, then only half of the house got the step up at his death (to $456,000, or half of $912,000). The other half — yours — retains its original tax basis. If the original purchase price of the home was $300,000, for example, your basis would be $150,000. The home’s total basis would be $606,000 (which is $456,000 plus $150,000). If you sold the house for $912,000, your capital gain could be $306,000, which would be well below the $500,000 exemption you could take if you sell the house within two years of the death. If you sell after the two-year mark, the gain above your single $250,000 exemption would be taxable.
The rate you would pay depends on your taxable income and what state you live in.
For example, a single person with taxable income of between $47,026 and $518,900 in 2023 would pay a 15% federal capital gains rate, plus whatever rate their state imposes. (California doesn’t have a separate capital gains tax system, so any taxable gain would be subject to the state’s regular income tax.)
These numbers are just to give you an idea of how capital gains taxes work. Your mileage may vary. If you renovated the kitchen or did any other significant improvements on the home, those costs could be added to your tax basis to reduce any potentially taxable gain. Also, selling costs will reduce what you actually pocket from the sale and your potentially taxable gain. For more information, see IRS Publication 523, Selling Your Home.
Taxes shouldn’t be your only consideration, of course. Relocating can be disruptive and expensive. Getting the house sold before the two-year mark makes sense if you were planning to move anyway, but don’t let fear of taxes scare you out of a home that otherwise suits you.
by Jim the Realtor | Jan 7, 2024 | Tax Reform
Prop. 19 allows homeowners 55 and older, the severely disabled, or the victims of a wildfire to move their lower Prop. 13 tax base up to three times to anywhere in California.
Before the law was enacted in 2021, homeowners only got one base tax transfer and it only worked if the new home was of equal or lesser value. Also, only a handful of counties at the time allowed the tax transfer. Today, owners can buy up with the price differential added to their property tax rate.
Here’s an abbreviated version of one recent case:
“For my wife and I, Prop. 19’s relief for retirees who want or need to change residences was a godsend,” Bruce said. “When we retired, we moved into a west Torrance neighborhood (in 2014) from a Redondo Beach townhouse. We thought it would be the last one we would ever move to. We were wrong.”
Bruce explained that shortly after they moved into the townhouse, local parents found an elementary school access point by the Steele’s home, which became flooded with traffic twice a day during the week. His neighborhood, Bruce said, became a cut-through street “subjecting us to rude and dangerous drivers.”
When Prop 19. was enacted, the Steeles were able to sell their Torrance townhome and buy a home in Rancho Palos Verdes, for which they paid $1.9 million. They bought the townhouse in Torrance for $950,000 and sold it in April 2021 for $1,660,000.
“With the help of Prop. 19 and the sale of some Oregon property, it did not create a property tax obstacle to our move,” Bruce said. “Otherwise, we might have had to move to a less desirable location or leave California.” He noted their townhouse was bought by a young family with children.
So far, thousands of homeowners age 55 and older in Southern California have taken advantage of Prop. 19’s tax-transfer benefit since the law was enacted.
More than 2,400 homeowners in Los Angeles County have been assessed and granted a tax transfer, according to Stephen Whitmore, public information officer at the county’s Office of the Assessor. There are 400 pending with the appraisal team now, he said.
The assessor’s office receives about 100 new transfer requests per month, Whitmore told me.
Orange County’s total transfers to date are approximately 4,520 with about 200 new transfer requests each month, said Neal Shah at the Orange County Assessor’s Office. The office has a backlog of 91 transfers.
In Riverside County, transfers total 2,009 with an average of 80 new monthly transfer requests, according to Sean Downs, chief appraiser at Riverside County Assessor-Clerk-Recorder. San Bernardino County officials could not provide any data by press time.
The above transfer data, by the way, excludes grandparent or parent/child transfers eligible under Prop. 19.
There are a few distinctions regarding the tax transfer. Homebuyers must file for the tax exemption in the first year of a new purchase — it’s not automatic. You have up to three years to file the base year transfer papers with your county assessor. The good news? There is no price cap with respect to the new home compared with the former home’s value.
If you are buying down in value “or equal or lesser value,” then the original home’s factored base year value may be transferred to the replacement home without any value adjustment.
You also can buy your up-leg residence first and then sell your former primary residence. Or, you can sell your departing residence first and then buy your up-leg home, so long as either of these is accomplished within a two-year window.
Here’s another example: A homeowner sells their Laguna Niguel home for $1 million with a factored base value of $500,000. Within the first year of the sale, the former Laguna Niguel resident buys a Newport Beach home for $2 million.
Here is the math: $1,000,000 x 105% = $1,050,000 (if the replacement residence is bought in year two, then you factor 110%). Take the full cash value of the replacement home of $2 million minus the adjusted cash value of the original property or $1,050,000. The difference is $950,000. Now add the $950,000 difference to the base value of $500,000. Your new property tax base is $1,450,000. That’s not bad when you consider the homeowner could have been paying property taxes on a $2 million home. So, thank you Prop. 19.
Whitemore also noted that if a senior over the age of 55 receives a property tax benefit due to Prop. 19 and then later moves out but continues to own the property, then that home will continue to enjoy Prop. 13 protections.
The California State Board of Equalization has a wealth of information at boe.ca.gov/prop19. You also can contact your county assessor’s office to clarify any questions.
https://www.dailynews.com/2023/06/01/prop-19-s-property-tax-transfer-a-godsend-for-southern-california-seniors/
by Jim the Realtor | Dec 18, 2023 | Tax Reform
One of the main reasons that the real estate market could levitate at these price points is the monumental wealth transfer between baby boomers and their kids. A major tax advantage is closing out at the end of 2025, and those with a healthy portfolio will be letting it flow – another opinion on it here:
Unless Congress acts, on Jan. 1, 2026, the estate, gift and generation-skipping transfer (GST) tax exemption amounts will be cut in half. A decrease in the exemption amount could result in significant additional transfer taxes for families with federally taxable estates. However, there is still ample opportunity for high-net-worth families to plan to utilize the current exemption amounts. This article will explore potential wealth transfer opportunities to capture and utilize the exemption amount before it may be lost.
In 2017, the Tax Cuts and Jobs Act (TCJA) doubled the existing estate and gift tax exemption amounts from $5.6 million per person (or $11.18 million per married couple) to $11.18 million per person (or $22.36 million per married couple), indexed for inflation annually. In 2023, the estate and gift tax exemption amount is $12.92 million per person (or $25.84 million per married couple).
The TCJA is set to expire at the end of 2025. Let’s assume that the estate and gift tax exemption amount has increased to $14 million by this time (due to adjustments for inflation). In that case, if Congress does not act, the exemption amount would decrease to about $7 million per person or $14 million per married couple. This loss in exemption amount could increase overall transfer taxes for certain families by millions of dollars.
We’ve been in a similar position in prior years and have seen that congressional gridlock can make reaching an agreement on preserving or increasing the exemption extremely difficult. While it is uncertain what, if any, tax-related legislation will come out of Congress in 2024 and 2025, it may be wise to explore one’s options to use the current existing exemption well before 2026.
If you can afford to use a portion or all of your existing exemption amount before Jan. 1, 2026, the amount used now cannot later be taken away from you. It has also been confirmed that if you use more exemption during life than is available at death (due to the decrease), the IRS cannot impose estate tax on those “excess” gifts as part of the taxpayer’s taxable estate when they pass. (Please note that there are some minimal exceptions to this rule for certain types of gifts made within three years of death.)
In addition, it’s important to note that when using your exemption during your life, you use it from the “bottom up.” This means that if you have $12.92 million of exemption and you use $6 million by making a gift (leaving you with $6.92 million), if the exemption amount is then cut in half, the $6 million of exemption you have used is considered to come out of the remaining amount, not the amount that was taken away.
In the above example, if you make a $6 million gift and the exemption amount is cut in half from $14 million to $7 million, you will have only $1 million remaining for future gifts or to shield assets from taxes upon your death. Consequently, locking in the exemption amount that may be taken away requires large gifts close to or at the full exemption amount before the amount potentially drops.
Read the full article here:
https://www.kiplinger.com/retirement/estate-tax-law-changes-how-to-prepare
by Jim the Realtor | Aug 24, 2023 | Local Government, Tax Reform |
From the La Jolla Light:
If the San Diego Housing Federation is able to place a progressive real estate transfer tax on the November 2024 ballot, La Jolla homeowners will be unfairly impacted.
The proposed tax would require property owners in San Diego to pay an additional 1.75 percent to 2.25 percent on all residential and commercial property sales above $2.5 million. A certain percentage of the funds generated from the tax would go to homelessness prevention assistance, eviction support programs and tenants’ rights education.
Roughly 90 percent of the available single-family detached homes on the market in La Jolla would meet the criteria for the proposed “mansion tax.” This potential tax imposition would weigh down property owners in La Jolla, leading to an imbalanced burden. While acknowledging the homeless and housing crisis in San Diego, it is important to recognize that excessively taxing specific groups of property owners or communities is not a viable solution.
San Diego homeless-service providers have already received $2.37 billion from local governments, and even with all that money, San Diego’s homelessness crisis is growing faster than it can be contained.
Levying additional taxes on property owners and throwing more money at the problem has proved not to work. The city of Los Angeles recently implemented a real estate transfer tax on luxury home sales to try to help the city tackle its homelessness crisis. Measure ULA, the “Homelessness and Housing Solutions Tax,” was approved by Los Angeles voters, and while this new tax is commonly referred to as the “mansion tax,” it applies to all real estate sales, not just residential properties. This also would be the case with San Diego’s transfer tax.
The Los Angeles tax became effective April 1 and increased the real property transfer tax on certain transactions by more than 1,000 percent. Moreover, Measure ULA was in addition to, not in lieu of, the existing base real property transfer tax, so property owners were hit twice as hard.
Before the implementation of Los Angeles’ “mansion tax,” home sellers were hustling to unload their homes quickly. Home prices were slashed and million-dollar transactions were hastened through escrow. A few sellers were even giving away cars and lavish incentives to entice potential buyers to close deals on their properties before the end of March. This flurry of activity was driven by the desire to evade Measure ULA before it went into effect.
It was projected the tax would generate about $56 million a month for the city of Los Angeles. However, in its inaugural month, it managed to generate only a modest $3.6 million because property owners simply pulled their homes off the market and the money that could have been generated through reassessment was not realized. Since March, sales of luxury homes in Los Angeles have almost stopped.
Homelessness involves addressing a variety of issues, including mental health, housing, employment, drug addiction and alcoholism. Changes in the law are needed to get people off the streets and into the help they need to function in society, not excessive tax increases on property owners.
While it might be tempting to believe that affluent property owners can effortlessly absorb an additional tax, it’s important to recognize that many of them may choose not to sell, as was evident in Los Angeles when the city implemented its “mansion tax.”
The unintended consequences of such a tax in trying to solve San Diego’s homelessness crisis greatly outweigh the benefits. The practice of raising property taxes on a small number of property owners is simply wrong.
Mark Powell is a licensed California real estate broker and a board member of the Greater San Diego Association of Realtors. He also served as president of the La Jolla Sunrise Rotary Club.
Link to Article
by Jim the Realtor | May 2, 2023 | Tax Reform
Bill has a great suggestion here, and the powers that be should strongly consider it.
Key points:
- The long-time homeowners who are aging-in-place just because of the heavy capital-gains tax will be freed up to move – and it would have little impact on tax revenue. Why? Seniors are so adamant about not paying Uncle Sam a penny that they will die in the house if necessary. The heirs don’t pay ANY tax, so it wouldn’t change the current tax revenue if a one-time exclusion was available – it’s not being paid anyway.
- More boomer liquidations would boost the property-tax revenue sooner.
- The gentriying neighborhoods would upgrade faster.
- It’s fair because it’s available to everyone. You just have to wait until you turn 65.
Something needs to be done because Jay Powell’s real estate reset isn’t going too well, and neither is the California take-your-property-tax-basis-with-you program. The older boomers have already decided to pack it in – and nothing is going to get them to move now.
But without some change in the current policy, there will be a lag in inventory for the next 10-20 years as the younger boomers start retiring. They are the ones who might cash out and leave the state – and without those moves, the Southern California market will be stuck with artificial restraints on the inventory.
Link to Bill’s article
by Jim the Realtor | Apr 27, 2023 | Tax Reform |
Congressman Jimmy Panetta (Monterey, CA) and Mike Kelly (PA-16) introduced H.R. 1321 – More Homes on the Market Act – which would double the capital gains exemption on the sale of a personal residence to $500,000 for a single filer and $1,000,000 for joint filers. This bi-partisan bill has been referred to the Ways and Means Committee.
This sounded really good until I found this – hopefully they will find a way:
by Jim the Realtor | Mar 20, 2023 | 2023, Frenzy, Jim's Take on the Market, Tax Reform |
It’s natural for people to wonder how this will all play out.
The Fed raising their rate until they crush inflation (and everything else), home prices are higher than just about anyone can afford, and inventory levels so low that prices will probably keep trending higher too.
How could this all stay afloat?
We are already in the midst of the greatest wealth transfer in the history of the world. Unless there are changes in the law, those who have accumulated between $5,000,000 and $11,000,000 will be expediting their distributions over the next three years to save on taxes before the limit is lowered in 2026:
https://www.irs.gov/newsroom/estate-and-gift-tax-faqs
The free-and-easy money has already been flooding into our real estate market. Back in the old days, the cash buyers always demanded a discount – but today the craziest sales are to buyers paying all-cash.
With the gift and estate taxes changing in 2026, it should continue, and possibly increase.
