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B.A.C.A.H. says

But you can take a year or so to be sure before selling. Because the property you're moving away from has a Prop-13 assessment without which would make returning to California much more difficult. Like cutting a lifeline.

I agree with your sentiment as an outsider. I do think though that to make change for your state, people cutting that lifeline will make the state better in the long term. Sometimes ripping the bandaid off is the best option.

And no, the grass isn't always greener on the other side, never can be. But if the place you live in is impacting anyone that emotionally, it's probably time to get out and try something new.

Family be damned. You can just fly to visit ;) Sorry, had to troll there. I like your views on most stuff, so just teasing. Respect your ideas even though we don't agree on them all.

A decade ago, when this website was mostly about high cost of housing in silicon valley, there was a standard line about buying verses renting. I think it was something like this: Figure out how many years of rent would equal the cost of the place you are renting, and if it's only 10 years it's worth buying; if it's 20 or more years it's better to rent; anywhere in between and it's not so obvious.

If you are considering being a landlord, I'd run that rule in reverse... if you can pull in the price of the house in rent within 10 years it's financially worthwhile renting the house out.

In my area (see screen name), the figure is more like 40 years. The only way you could think buying is a good idea is that "real estate only and forever increases exponentially in value." (I got that phrase from a used-house salesperson who makes enormous commissions for doing nothing useful, so it must be true!)

Based on current market values (not purchas price) the cost of renting a house in my hood in tri valley is very high, but it is a bargain compared buying.

In many areas of the country, if you are talking about landlording, you can buy mulitple homes for what you get for a California crap shack, and get an immediate return that can be as high as 7-10 percent a year on the purchase price in rent return. In California, compared to purchase prices or nominal value, you would be doing well to get 3 or 4 percent, but sometimes even lower. Other things that have to be paid, also, are higher homeowner's fees in many areas.

If you move to the right spot, you could start your own little real estate empire with your filthy lucre fiat equity, and your profits could rent you a nice home in a nice spot for a couple of months vacation back in California every year.

Prop 13 tax basis should be passed on to your children like the heirloom family silverware...

EBGuy says

Prop 13 tax basis should be passed on to your children like the heirloom family silverware...

A new prop slightly upended Prop 13 inheritance. Now, I think, to inherit the Prop 13 you actually have to live in the house. There was a huge discussion recently on NextDoor about this that ranged the entire spectrum of opinions. Quite entertaining and also a bit scary to hear people's "logic" in some cases.

SunnyvaleCA says

EBGuy says

Prop 13 tax basis should be passed on to your children like the heirloom family silverware...

A new prop slightly upended Prop 13 inheritance. Now, I think, to inherit the Prop 13 you actually have to live in the house. There was a huge discussion recently on NextDoor about this that ranged the entire spectrum of opinions. Quite entertaining and also a bit scary to hear people's "logic" in some cases.

That was Prop 19. They’re gathering signatures to put it back on the ballot to repeal it. Let’s see how it’ll go.

SunnyvaleCA says

A new prop slightly upended Prop 13 inheritance. Now, I think, to inherit the Prop 13 you actually have to live in the house.

Thanks SunnyvaleCA. I thinks the spikes have affected my short term memory of anything that was voted on during the pandemic. Your are correct.
The new property tax increase of Proposition 19 cannot be understated. Family transfers (via sale, gift or death) as of February 15, 2021 on all rental properties, all investment properties, and any properties not used as the parents’ primary residence, will result in reassessments to full market value, potentially resulting in thousands upon thousands of dollars in new annual property taxes to the next generation of owners, even if the children plan to live there. Family transfers starting February 15, 2021 on family homes where the parents reside at transfer, and the children will live within one year of transfer, worth over $1mm in today’s value, will result in a partial reassessments, potentially resulting in thousands upon thousands of dollars in new annual property taxes to the next generation of owners.
From Lucas Real Estate.
Makes me wonder what Ducky will do. Overall, though, this should be helpful to California in bringing more homes to market (and increasing tax revenue).

EBGuy says

Prop 13 tax basis should be passed on to your children like the heirloom family silverware...

Only if they want to live in the region.

Life is becoming miserable here. Even if we (and our kids) have the means to afford it, being surrounded by others who are either over-stressed by the crowding, high cost of living including super high taxes, juggling parenting, childcare, public school curricula, stress of making it work on two income households,- or are rich by living off the family wealth from abroad or rich from exploiting the misery of folks here, - well, lots of young folks who are starting out don't necessarily want to sign up for decades of living in that milieu. Selling out and forfeiting the Prop-13 Legacy might be just the thing for them.

On the other hand, if the kids inherit the home and the Prop-13 assessment, they inherit the whole amount if it's less than the inheritance tax exemption with I think is $10 million nowadays. I may misunderstand the tax law, but I think if they wanna sell an inherited property the basis is stepped up. If that's right, Prop-13 notwithstanding the house would be worth more to the kiddos when we're dead, than selling when we're alive with only the $500k (or $250k) exemption.

B.A.C.A.H. says

I may misunderstand the tax law, but I think if they wanna sell an inherited property the basis is stepped up.

I think that's right. The only little wrinkle is if the deceased's net worth was above $10 million. Then things are only partially stepped up? I think that's what you call a "rich person's problem."

I wouldn't be worrying about my surviving relatives squabbling over my estate like a bag full of scalded cats. You see the inherited places in Santa Cruz that cost the families nothing to keep, They often are the ones in disrepair with weeds in the yards. A lot of them are seldom even visited.

Often, the inheritors will sell the place down the road, anyway and cash out. Prop. 13 will likely not keep your eternal genetic dynasty afloat.

It's 'catch me if you can' on using an owned and/or inherited prop.13 property as a rental. I hear it is done under the radar with cash rents, but I don't know how long such a scheme would last or what the costs and penalties when or if discovered.

EBGuy says

Overall, though, this should be helpful to California in bringing more homes to market (and increasing tax revenue).

My feeling (stated here and elsewhere) is that Prop 13 should only apply to original owner's primary residence. That would convert even more houses from rentals to (new) owners. Original selling point of Prop 13 was to keep communities stable by allowing granny to stay in her home. Getting Prop 13 benefit on a rental property seems the opposite: turn communities into less stable rental communities.

Regarding just expected future profits -

Return on capital from RE won't generally come close to stocks in terms of say, expected CAGR over a 10-20 year window. I haven't looked recently, but before covid I think big city areas of CA had about a 4-6% CAGR historically over the past few decades, which is pretty good RE appreciation, and is more than the nationwide average of about 3%. The s&p 500 historically returns about 10% CAGR (neither figure is inflation adjusted). You might get an extra 2-3% CAGR from rent on a typical million dollar CA shack after rental expenses.

So if you have 1 million in a house, vs 1 million in stocks, and we assume they will continue to appreciate at about the same rates as recent decades, stocks might give you 50-100% better returns on your capital. Of course there's taxes and many other considerations.

From what I've usually seen, the people who make money with RE usually do so mainly via:
#1 they can use inexpensive leverage via mortgage loans
#2 various beneficial tax treatments of RE

But RE may outperform stocks if you were to say, take the million and use it for down payments on a few properties and rent them out, allowing you to benefit from a lot of leverage.

I'm not sure what the house is worth now, and how much of that is capital gains, but you should consider taxes, as they will greatly affect things if you have a lot of equity. It sounds like you lived in this home, so you can probably use the 250/500k tax deduction to help mitigate taxes if you sell. Alternatively, for business/investment RE you can do a 1031 exchange, selling the property and using the money to buy other properties, avoiding taxes on the reinvested money. I'm not sure if you need to get it "classified" as investment RE first, possibly by renting it out for a few months before selling and 1031ing it.

A potential strategy I would consider would be to 1031 exchange into new properties in another state, avoiding the CA tax vampires, and then you could keep / rent those properties, or just sell them a year after safely distancing yourself from CA, so you can avoid the CA taxes on your capital gains, instead paying hopefully lesser taxes to the new state (if any taxes at all). Hopefully the new state is more favorable tax wise. Additionally, if you 1031 exchanged into a few properties, assuming you want to sell them relatively soon instead of renting them long term, you could sell 1 per yr as a method to avoid having a big burst of capital gain in a single year, allowing you to remain in lower tax brackets by spreading the cap gains out over multiple years. (EMAN gave me that very good strategy idea).

B.A.C.A.H. says

I may misunderstand the tax law, but I think if they wanna sell an inherited property the basis is stepped up.

That's right. Biden made a big deal while campaigning, saying he was gonna kill the step up in basis for inherited assets. Doesn't look like it will happen now, but I no longer feel so confident that I can plan on this step up being around in 10-20 years.

Fort Wayne,

I don’t know your personal situation, but there are a few ways to strategize your situation.

Let’s say you bought your house for $200k. It’s now worth $1M. You qualify for $500k exclusion so your tax liability is on $300k net gains after the exclusion and your cost basis.

Assume you own it free and clear. I’d do a $500k cash out refinance. It’s tax-free and you use it however you like.

Rent the house out for a year or two while you live at your new location. If everything is cozy, sell the former house then, pay off $500k loan so you only have $500k to 1031 exchange into the next asset(s).

If you want, you can 1031 exchange into something would you move-in and live “forever” or at a later date.

After the 1031 exchange, rent it out for a year or so. Then you can legally move-in to that house. However, since it’s a rental before a primary, the “new exclusion” will be prorated. Let’s say you live there for 9 years and it was rented out for 1 year, you would get 90% exclusion.

Talk to your CPA. I hope s/he is savvy with real estate.

Being an out of state landlord with CA property is just setting yourself up for failure (in general). Take the money and run,

RedStar says

Being an out of state landlord with CA property is just setting yourself up for failure (in general). Take the money and run,

Hire a professional property manager and let them deal with the screening and selecting. We have not had 1 eviction in the last 9 years with our property manager. Be an investor, not a landlord, once you’ve moved away.

I'll say it again: Just GTFO and don't look back!

My evacuation date is 6 months and counting.

I'm going to get hung up in TX and not make it to FL like I'd planned for family reasons but eventually FL it will be.

Because that's even FARTHER from CA.

FJB says

I'll say it again: Just GTFO and don't look back!

Yeah! It's not like your selling your ancestral homeland. Cash out now.

Onvacation says

Cash out now.

This is actually not a bad idea given how out of sync real estate prices at the moment. The benefit may outweigh the risk of holding on and vice versa.

I feel like California is going to get hit with a massive earthquake in the near future.

On top of everything else.

Patrick says

I feel like California is going to get hit with a massive earthquake in the near future.

On top of everything else.

Been waiting for the big one since that movie "Earthquake" came out in 1974. Anyone remember "Sensurround"?

Patrick says

I feel like California is going to get hit with a massive earthquake

Onvacation says

Been waiting for the big one

Guys, do you "eye-spy" the major faults in the Bay Area? There's places on both sides of the bay where the major faults San Andreas (Point Reyes area, Peninsula, South Bay) and Hayward (East Bay) faults are clearly demarcated in the topography.

It's fascinating.

If you're not in six figures for income, you're allowed $25,000 of passive losses. Rental income can be offset with expenses (and can even go negative). For someone who is married, income over $81k would normally be taxed at the federal rate of 22%. Rental expenses include:
1. Depreciation (1/27.5 value of the house every year)
2. Mortgage interest
3. Property taxes
4. Maintenance and repair expenses
Allowed passive losses are phased out from $100k to $150k of income (MAGI). While depreciation is ultimately recaptured (taxed) when the home is sold, you can see how you could be cash flow positive, but show a paper loss while being a landlord. IANAL. YMMV. Not tax advice.

Also, every time you come back to visit, it can be a tax deductible event. All meals, car rental, hotels, etc… Your cell phone bills are also tax deductible as you’re using it for business.

The reason a lot of business owners drive nice cars because it’s tax deductible. They dine often and in nice restaurants because it’s tax deductible.

There’s no reason to settle for an Android when an iPhone is tax deductible so are the iPad and MacBook, etc… Just to name a few.

Patrick says

I feel like California is going to get hit with a massive earthquake in the near future.

On top of everything else.

Yes.

It will likely hit hard in a place like hayward, right above the fault line, and so will be deemed a "racist earthquake" for hurting minorities in that area.

On second thought, it doesn't matter where it hits. It will be a racist earthquake somehow anyway.

DooDahMan says

FJB says

but eventually FL it will be.

For all the people hell bent on moving to Florida have any of you bothered to stay up to date with the price of and availability of home owner's insurance not to mention Hurricane, Tornado, Wind and Flood rider policies nor covered under the basic Homeowners Policy ?

You may not like what you find out or else have some really deep pockets and not file any claims - filling a claim will result in even more pain if your policy even gets renewed.

https://www.abcactionnews.com/news/price-of-paradise/perfect-storm-sending-florida-homeowners-insurance-premiums-through-the-roof?source=patrick.net

My plan is a very large live aboard sailboat if I don't get stinking rich in which case I'll get a place too. I'll only live on it 3 months out of the year (winter season) and the rest it'll be dry docked. Although my pal just got a nice place in St. Petersburg with extra room he's offered up. But that's the wrong coast, I'd prefer East for the gulf stream. He plans to flip yachts as a hobby. He's been sending me videos of a manatee he gives drinks of water to from a garden hose each morning while drinking coffee.

He's one of my pals I used to bar hop with in San Diego. They got out last year after the schools here wouldn't stop telling their elementary aged kids they're terrible for being white and other nasty stuff. Two surprises: One that they left at all, he's the incarnation of a cooler Ron Burgundy in the Gas Lamp district. Mr. San Diego. The other that we both had similar ideas about Florida and waterfront. I found out about that while frozen into my parents house in San Antonio during the winter storm last year that took out the state. He was stuck in the Dallas airport trying to fly to FL to do a deal on his house and called to tell me about his predicament. Also ironic we were both stuck in TX.

Eman says

Fort Wayne,

I don’t know your personal situation, but there are a few ways to strategize your situation.

Let’s say you bought your house for $200k. It’s now worth $1M. You qualify for $500k exclusion so your tax liability is on $300k net gains after the exclusion and your cost basis.

Assume you own it free and clear. I’d do a $500k cash out refinance. It’s tax-free and you use it however you like.

Rent the house out for a year or two while you live at your new location. If everything is cozy, sell the former house then, pay off $500k loan so you only have $500k to 1031 exchange into the next asset(s).

If you want, you can 1031 exchange into something would you move-in and live “forever” or at a later date.

After the 1031 exchange, rent it out for a year or so. Then you can legally move-in to that house. However, since it’s a rental before a primary, the “new exclusion” will be prorated. Let’s say you live there for 9 years and it was rente...

thanks

Bless their Poor Pitiful Hearts.

https://www.msn.com/en-us/news/us/fremont-landlord-says-tenant-who-owes-101k-is-using-covid-laws-to-avoid-eviction/ar-AAVZrGb?ocid=msedgntp&cvid=eee6c8a15c4f40e298ca49fc858d5c04&source=patrick.net

B.A.C.A.H. says

Bless their Poor Pitiful Hearts.

https://www.msn.com/en-us/news/us/fremont-landlord-says-tenant-who-owes-101k-is-using-covid-laws-to-avoid-eviction/ar-AAVZrGb?ocid=msedgntp&cvid=eee6c8a15c4f40e298ca49fc858d5c04&source=patrick.net

This is why you want to be an investor, not a landlord. Hire a professional property management company to manage the rental for you. If they screw up with the screening, In this case, fake W2 and fraud credit report. The property management company would have caught them. Also, they do previous landlord verification too. If they screwed up with the screening, their insurance company would pay for their negligence. Highly unlikely that the PM company will screw up.

As I mentioned previously, our PM company manages almost 100 units for us. NOT 1 eviction in all these years. Not 1 eviction through the pandemic. A couple of tenants fell behind in rent briefly during SIP, but they all caught up shortly after. Don’t be penny wise pound foolish. Let the professional do their job.

Eman says

As I mentioned previously, our PM company manages almost 100 units for us.

You are very fortunate to have found a decent PM company. My experience (along with a few others who hired PMs) is PMs are high priced and use your maintenance funds as a piggy bank for their contractor buddies. Stuff like spending $200 to reset a flapper valve in a toilet, or putting on a new roof without doing a tear-off of the old shingles but billing for a tear-off anyway.

Sell it and strategize where you think the mass exodus influx will land those fleeing over crowded Cities that lack the inventory. And try to position yourself to have land for the inevitable building boom in this country We're way past due for a building boom, and new cities and towns.