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CA prop 13 and Step up basis is a lethal combination

By SFace follow SFace   2013 Apr 5, 2:41am 9,954 views   21 comments   watch   nsfw   quote   share    


This is a real situation:

A long-time San Francisco homeowner bought their house in the 70’s. 50K or so, property tax is less than 2K a year in 2013. Property value is approximately 2M. They would like to downsize and sell the house and buy in a prop 13 city so the base would carry-over and get the windfall. They are in their 70’s. An agent in their church has been begging them to sell. basically great seller's market and cash out the money and say things that are appealing and what they want to hear at their level. blah blah blah.

So the couple was determined to sell and about to tell their kids. The problem is they have a 2M gain, of which 1.5M is taxable. That is an income tax bill of more than 400K and closer to 500K with the recent changes in CA and Fed. The kids don't want to sell regardless of what the agent thinks.

So what was the outcome, her three kids have pooled together 100K for their elderly parents to take them the rest of their lives. If they need another 100K, they can pull it just as easy and on and on. The house would not be sold and still enjoy 2K in property tax. It would be eventually be handed off to their kids equally. The plan is once they pass away, their 50K base steps up to a 2M base and the government will not get one red penny permanently. The property tax would remain 2K a year.

At which point the kids can 1)sell and not pay a dime in income tax, 2) not sell but cash out with some 2.5% loan or rent the property with little fixed cost.

It is a long winded answer of saying if you think boomers will downsize from their expensive prime property, good luck with that one. It is not happening partially due to prop 13 and step-up-basisi rules which is amplified in prime CA markets. My mom is in a similar position and she is not selling ever, exactly as described above. I'll find a way to pay her 500K than give it to uncle sam and Auntie Sally

1   edvard2   ignore (1)   2013 Apr 5, 3:11am     ↓ dislike (0)   quote   flag        

But this particular situation doesn't take into account that a LOT of older Californians in similar situations simply sell and relocate to a cheaper area. So let's say they did sell and had to pay 500k. That's still close to a million dollars in money they've made off the house. A million bucks goes a LONG way in most any other place in the country, many know what, and hence why a lot of Californians retire to Oregon, AZ, or WA. There they can buy a house for cash and still probably have most of their equity savings.

2   BoomAndBustCycle   ignore (0)   2013 Apr 6, 10:56am     ↓ dislike (1)   quote   flag        

edvard2,

Most parents would still rather see that money go to their children than the government.

I guess your parents hate you edvard2 :)

3   thomaswong.1986   ignore (5)   2013 Apr 6, 3:25pm     ↓ dislike (1)   quote   flag        

BoomAndBustCycle says

Most parents would still rather see that money go to their children than the government.

kids got their education and career.. its up to them to succeed or not.
as for the trust fund babies... most of them end up as addicts who die
off after they partied way to much. so no parent will not just hand over
their savings so easily.

4   marcus   ignore (11)   2013 Apr 6, 3:40pm     ↓ dislike (0)   quote   flag        

thomaswong.1986 says

so no parent will not just hand over

their savings so easily.

Wow. This explains a lot.

5   ducsingle5313   ignore (1)   2013 Apr 6, 3:55pm     ↓ dislike (0)   quote   flag        

The solution is for the government to identify properties where the market value and income tax basis are completely out of whack, buy the properties under eminent domain, and re-sell them.

6   New Renter   ignore (11)   2013 Apr 6, 4:11pm     ↓ dislike (1)   quote   flag        

These people are complaining? They have $2M in appreciation! They can HELOC whatever they need and the kids can pay it back when they inherit.

7   New Renter   ignore (11)   2013 Apr 6, 4:12pm     ↓ dislike (1)   quote   flag        

ducsingle5313 says

The solution is for the government to identify properties where the market value and income tax basis are completely out of whack, buy the properties under eminent domain, and re-sell them.

Or kill Prop13 with no grandfathering.

8   Bellingham Bill   ignore (5)   2013 Apr 6, 4:48pm     ↓ dislike (0)   quote   flag        

I'm in the same situation too, parents bought in 1981, too bad not in SF

Looking forward to my $1200/yr property tax burden . . . going to beat renting, LOL

10   Kevin   ignore (2)   2013 Apr 6, 6:28pm     ↓ dislike (3)   quote   flag        

Most people don't live in California. This argument is stupid.

11   Buster   ignore (0)   2013 Apr 6, 8:05pm     ↓ dislike (0)   quote   flag        

Prop 13 sucks for the reasons listed above. It has created a two tier system. Those who struggle to pay taxes, namely the working poor, and those who don't pay taxes or their fair share of taxes, the real estate lotto winners, and now worse, their instant millionaire heirs. It must change or be modified so that the greatest burden isn't placed on those who can least afford to pay. That is precisely why Prop 13 was enacted in the first place. Now, it mostly has evolved helping those who do not need the governments help.

12   coriacci1   ignore (2)   2013 Apr 7, 1:25am     ↓ dislike (0)   quote   flag        

repeal prop 13!

13   drew_eckhardt   ignore (0)   2013 Apr 7, 2:15am     ↓ dislike (0)   quote   flag        

We need a law like Colorado's TABOR which protects all the state's residents from greedy governments without favoring certain classes of people and entities like Proposition 13.

TABOR prohibits tax increases without a popular vote and doesn't allow total collections to increase faster than the rates of inflation and population growth. Originally this was based on the previous year's spending which made cuts during recessions stick, although Referendum C undid that with its cap growing according to population and inflation from the previous year's cap with the delta between the original TABOR cap and Referendum C cap required to be spent on important things like health care, education, and police/fire protection.

Property taxes decrease in real dollars as your building depreciates while other people are moving into new developments and scraping their small old houses off to build expensive new ones except when the people want something important like increased spending on K-12 schools in their district.

The woman who bought my Colorado home got a reasonable property tax bill like I did even though the property bubbled up 30% in real terms. The people that own it now get the same break she did.

The income tax rate dropped to 4.63% during a boom and has stayed there since

The law also prevents government spending increases during cyclical boom times which become unaffordable without painful tax increases to cover those commitments during the inevitable downturns.

14   drew_eckhardt   ignore (0)   2013 Apr 7, 2:40am     ↓ dislike (0)   quote   flag        

coriacci1 says

repeal prop 13!

While my salary usually keeps pace with inflation, I haven't had a raise in five years which means I'm actually making 7.5% less in real terms than in 2008.

It would be unfair to tax me substantially more because my neighborhood became more popular and/or too many of the new comers decided to use their seven figure stock pay offs to bid up prices.

A fairer solution is _expanding_ proposition 13. The taxable value step up on sale should be eliminated so a property has the same fair taxes regardless of how often it changes hands.

15   AD   ignore (0)   2013 Apr 7, 3:05am     ↓ dislike (0)   quote   flag        

Drew, try more like 10.4% less in real terms than in 2008 based on a 2% annual inflation rate. And I am being generous here instead of assigning the real inflation rate which is 3% annually.

16   Kevin   ignore (2)   2013 Apr 7, 3:23am     ↓ dislike (0)   quote   flag        

drew_eckhardt says

coriacci1 says

repeal prop 13!

While my salary usually keeps pace with inflation, I haven't had a raise in five years which means I'm actually making 7.5% less in real terms than in 2008.

It would be unfair to tax me substantially more because my neighborhood became more popular and/or too many of the new comers decided to use their seven figure stock pay offs to bid up prices.

A fairer solution is _expanding_ proposition 13. The taxable value step up on sale should be eliminated so a property has the same fair taxes regardless of how often it changes hands.

No. Rising house prices should force people who can't afford the area out. This results in a self correcting pricing mechanism. Like what most states have.

No state with California's density and income level should have California's housing prices.

17   justme   ignore (0)   2013 Apr 7, 5:05am     ↓ dislike (0)   quote   flag        

Reduce California property tax from ~1% to 0.4% but make no exceptions for anyone.

18   thomaswong.1986   ignore (5)   2013 Apr 7, 6:42am     ↓ dislike (0)   quote   flag        

Bellingham Bill says

Looking forward to my $1200/yr property tax burden

prop 13 was not responsible for that.. check prop 58 (1986)

http://www.boe.ca.gov/proptaxes/faqs/propositions58.htm#1

19   curious2   ignore (0)   2013 Apr 7, 7:02am     ↓ dislike (1)   quote   flag        

SFace says

Auntie Sally

Who is she?

20   New Renter   ignore (11)   2013 Apr 7, 1:33pm     ↓ dislike (1)   quote   flag        

Kevin says

No. Rising house prices should force people who can't afford the area out. This results in a self correcting pricing mechanism. Like what most states have.

No state with California's density and income level should have California's housing prices.

Same goes for companies. If your employer can't afford to pay its workers to live in a high cost of living area or to attract new talent then it needs to make room for one that can.

21   oaky   ignore (0)   2013 Apr 7, 2:01pm     ↓ dislike (0)   quote   flag        

you are in idiot democrat new renter, idiot


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