Maureen Kennedy, Realtor

Library: Property Taxes & Capital Gains

Be sure to consult your tax advisor concerning all tax issues related to real estate. For more information, please contact me directly.

Californians have good reason to be more concerned about the effects of a move than residents of other states:

Since Proposition 13, our property taxes have been limited to a two-percent annual increase over the level established at the time of purchase, and
our high-cost housing translates into large capital gains when held over a long period of time.

The sale of a home would normally trigger much higher tax payments on a new home, and capital gains on the sold home that might exceed the current $500,000 per-couple exclusion.

The law allows owners to implement strategies to reduce future taxes, and to encourage families to make housing decisions that make sense for them in their current stage of life.

For instance, assume a couple bought a home in 1978 for $50,000, and it is now worth $1.2 million. Property taxes on the home are likely below $1,000 annually, based on an annual increase limited to two percent. Excluding the effects of transaction costs and improvements over the years, if the couple sold that house today and bought an identical home next door they might face:

Property Tax:
Tax on New Home:	$12,000 annually (at one percent of $1.2 million purchase price)
Tax on Sold Home:	$1,000 annually
Difference:	$11,000 annually
30-year bond value of an $11,000 annual payment at five percent:	$170,000

Capital Gains Tax:
Gain:	$1,200,000
Current Value
	-50,000	Home Cost
	$1,150,000	Net Value
	-500,000	Capital Gain Exclusion
	$650,000	Net Capital Gain
Tax on Gain:		$65,000 to $130,000, depending on the tax bracket of the homeowner and other tax deductions.

In California law, there are several ways to eliminate property tax hikes when buying a new home.

Proposition 60 provides that homeowners, one of whom is over 55, as well as the disabled, may transfer their current assessment to a new home if:

Both homes are in the same county;
The original home is sold and the new home is bought within two years of each other;
The new home is priced at a level equal to or less than the value of the original home (with upward adjustments if the new home is bought a year or two later); and
They apply for an exemption from county offices.

Proposition 90 extends the geographic limits of Proposition 60 to other counties in the state: Owners who buy in Alameda, Kern, Los Angeles, Modoc, Orange, Santa Clara, San Diego, San Mateo and Ventura counties can also carry the assessment exemption to their new homes.

Proposition 58 allows the transfer of real property between spouses and transfers of the principal residence and the first $1 million of other real property between parent and child are exempt from reassessment. (Proposition 193 exempts inheritances from grandparents from reassessments).

More About Capital Gains

In his book Selling Real Estate without Paying Taxes (Dearborn, 2003), Richard T. Williamson outlines several strategies to reduce or defer taxes as you sell your home. In addition to taking advantage of the primary residence exclusion ($500,000 in excluded capital gains per couple and $250,000 per individual on any home held for more than two years), Williamson describes:

Starker 1031 Tax-Deferred Exchanges
Installment Sales
Private Annuity Trusts
Charitable Remainder Trusts

Each of these strategies, if implemented appropriately, can eliminate or at least defer capital gains taxes due at the time you sell your heavily appreciated home.

For a referral to a tax specialist experienced in these approaches, please contact me directly.