patrick.net

Beijing food is expensive and not all that great tasting. Peking duck is overpriced and not particularly tasty.

I have had better peking duck in Hong Kong and Canada than in Beijing.

I am not hopeful that they can bring their toilets to international standard by 2008.

RC:

I'm quite familiar with ROI, ROE, even ROIC, not to mention the time value of money, and all its variants.

Nonetheless, your arguments vis-a-vis Prop13 are self-serving and question your credibility in what is otherwise well informed debate.

Property Taxes are *not* an example of discretionary, avoidable taxation. I suspect you already know that, and are just trying to create a non-analogous substitute to further your position. The logical extension of your line of reasoning is that eventually there will be exactly 1 person paying all property taxes and n-1 people renting from that 1 person.

And what about how Prop 13 introduces frictions that work to retard your own theory of exburbinization? Seems to me you should be all in favor of gentrification sans government intervention.

offo,

Surfer X reminds us that another odd aspect is that many long time owners have refinanced several times during their occupancy at the same residence. Well, when we "refinance" we have an appraisal done and in essence are in fact "re-purchasing" our home. Hmm? Take out equity based on the increased value yet retain your previous value for tax purposes? So you CAN have your cake and eat it too!

Any time I've confronted people about this I get the "Why do you hate America look" like I'm there to confiscate their guns.

offo / DinOR,

The fact that refinancing and inheritance have no/minimal effect on property tax is the most obvious flaw in Prop 13. I guess one can argue for Prop 13 based on purchase price, but this "I will have my cake and eat it too" is beyond unfair. This is a BIG flaw.

On the related note, if you take a cash out refinancing and put the money in tax-free Govt bonds, IRS does not like it. You cannot have it both ways. Either take a deduction on the mortgage interest OR pay taxes on the interest you earn from the cash out. Not both.

Any time I’ve confronted people about this I get the “Why do you hate America look” like I’m there to confiscate their guns.

That's because there's this strange concept that appreciation is "earned."

As in "I lived here" so "I earned that $xxxx".

RC,

Point taken on the one-time transfer provision --I had forgotten about that. On the plus side, it does mitigate the Golden handcuffs effect a bit, though the macro impact is probably limited because it can only be used once.

You mean like an idiot next door overpaying? I made my deal. What if somebody decided to pay $80,000 for a 1997 Camray because he won the lottery and it was once his first car and he wanted it no matter what.

I don't see the analogy's relevance here, Robert. Property tax is levied EACH year, based on the current tax basis of the property. It's not a one-time sales tax, based upon the purchase price. The tax basis for each year used to have some relationship with the current "market rate" for the property, until prop. 13 came along and decided to "fix" that (heavily in favor of people who bought before Prop. 13 went into effect, or shortly thereafter).

Yes, you "made your deal" and won the Prop. 13 birth lottery. Congratulations, but what does the price of oranges in Pittsburgh have to do with the weather in Peking? If property tax is supposed to be a form of "use tax" that's supposed to bear some relationship to CURRENT market value of the property, then how is de-coupling that relationship supposed to make it more "equitable" or generation-neutral?

I can see keeping the 1% cap, but only allowing 2%/yr. "inflation adjustments" has created extreme inequality in tax burdens (which are only going to grow worse over time --see Randy's coke-snorting trustafarian example). Prop. 13 heavily penalizes the young for being young and rewards the old for being old, and the born-rich for being born-rich. Not a very socially "equitable" or age "neutral" tax scheme IMO.

On the related note, if you take a cash out refinancing and put the money in tax-free Govt bonds, IRS does not like it. You cannot have it both ways. Either take a deduction on the mortgage interest OR pay taxes on the interest you earn from the cash out. Not both.

Unless your refi rate is really low, wouldn't you lose money on this transaction? My understanding is that interest rates on tax-free bonds are super low.

Out of curiosity, why don't more seniors take advantage of Prop 60/Prop 90? My understanding is that those two Props allow them to buy elsewhere in California and still retain the old property tax basis.

There is a way to play the rate arbitrage - if IRS were to allow it. If you have lot of equity from a house purchased long ago - take a cash out refinancing with a low ARM. For the duration till it resets, invest the money in bonds. It was possible to get an ARM for less than 5% and invest in US treasuries that yield about the same. For 33% tax bracket the "free" money is not negligible.

HARM, perhaps you might be interested in a new Church I have founded. It's central tenet is "Do unto the Boomers as they do unto you". I have also adopted rule #2 of the Boomer Code, "less for you equals more for me". We also are exploring Boomer math, as it is truly fascinating, did you know 60 equals 30? While the rest of the nation is suffering from Boomer fatigue, I say why join them when you can exploit them. "yes you are great, and why yes I do think the Stones are the best band ever, of course I want to hear them all the time" "father time should have no impact on your boner, just because you are 63 with a long history of substance abuse and want to pleasure yourself via your 4th trophy wife, I say go ahead, (cue boomer driving off into the sunset in, of course, a muscle car)."

I am trying to think of a name for my Church, I have come up with Sweet Holy Lady of the Everlasting Buttrape. But I am open to all suggestions.

Remember HARM, the pursuit of super profits is the religion of the capitalist*.

*actually taken from a Chinese/English dictionary from the PRC, under "religion"

I am all for Prop 13, your tax basis should only shift when you sell. This includes when you re-sell the house to yourself. When you refi your tax basis should be bumped to the new appraised value to which you have leveraged yourself.

Sweet Holy Lady of the Everlasting Buttrape

I am all for Prop 13, your tax basis should only shift when you sell. This includes when you re-sell the house to yourself. When you refi your tax basis should be bumped to the new appraised value to which you have leveraged yourself.

Surfer-X,

Why do you hate Boomerdom so? Don't you know it is the Fount of all that is Good and Right in America today?

You and I are not fit to kiss the flabby tattooed asscheeks of the most drug-addled Stones/Beatles/Doors groupie. They ended slavery, you know, as they marched arm-in-arm with Dr. King. All while ending the war in Vietnam, landing on the moon, winning the Cold War, giving women the vote, bringing honesty to government and big business, curing cancer, ending world poverty, bringing about world peace and putting an iPod in every garage.

How many years of falling assessments or sideways RE markets would it take for Prop13 protections to wash out?

As to the blame game, people under 30 in 1970-80 California weren't seen much at the polls. The proposition was devised to rein in the state's spendthrift ways, and assumed its present, miserable form only as legislative committees 'converted' the original language to statutes and regulations. In my opinion, it was co-opted.

How many years of falling assessments or sideways RE markets would it take for Prop13 protections to wash out?

Answer: Prop. 13 tax burden will never "wash out" (equalize) due to falling or sideways moving RE prices. In fact, just the opposite. The further we get from 1979, the higher inflation goes, and the more "legacy" title transfers that happen, the less equal things get.

Ever tried to get a significantly REDUCED assessment on a property before? Good luck with that. I've never tried, but the few people I know who did try it during the last crash (mid-90s) weren't exactly welcomed with open arms by the local tax board.

StuckinBA,

Carol Lloyd had a great article about one of her relatives that had never done ANYTHING but "equity extraction"! It would have been funny if it weren't for the fact that it was so obviously abusive.

This (now elderly couple) had paid for everything from kids college to weddings to other RE ventures ALL from a pretty modest "cottage"! They have never even come close to paying it off. Why? It's the never ending equity machine that just gives and gives! (And every penny of it tax free I might add).

The reason this topic has found new life with me is that just this afternoon I had to deliver a client's IRA statements to a local lender and I carefully brought up these types of issues. So there I am sitting w/ two MB's and they were actually laughing about how they had financed, built and SOLD several homes all with a "two year plan". Not only did they not pay taxes on the "market appreciation" they also paid zippo on their "sweat equity" in building the home! Better yet they were able to exploit MID.

When I asked them to define "primary residence" the reponse was the typical "the one that I'm selling" (snicker snicker, nudge nudge). My whole question regarding these issues is where is the line between "encouraging home ownership" and allowing people to operate businesses tax free? It's pretty obvious to me that most of us can no longer even tell the difference.

Robert Cote,

The golden handcuffs is absolutely not a canard. I saw a gorgeous coop a few years ago and for a few minutes considered making an offer on it. I then realized that while I did not mind paying for the place (before the astoundingly insane run-up) and I did not mind the maintenance fee I highly minded paying the additional $25,000/year for the exact same city services I was receiving at the time (and still am on my 1994 tax basis). I have a neighbor in my building who considered downsizing her place because her husband is no longer there but she also decided not to move because of Prop 13.

FAB,

I own a fraction of the land on which my condo building sits. It's right in the deed.
Also, the corner of Franklin and California would be an extremely loud corner to live on. Every time I walk over to Whole Foods there is debris from car accidents in the gutter. There must be a crash there several times a week.

I didn’t win anything. I made a deal and kept to it. The same deal is available today.

Really? So I can go out and buy a house at its 1979 tax basis today? Wow, sign me up, dude! ;-) By the end of the current just-starting correction, we *might* see 1997 nominal prices again IF it's really, really severe and IF inflation drops to zero, or --egads-- deflation happens. However, I'm not holding my breath on that one.

I've said it before, I'll say it again. If Prop. 13 is such a wonderful "deal", then why not extend its full benefits to ALL people, not just birth Lotto recipients and trustafarians?

Why not assess EVERYONE's property at 1979 +2%/yr. ? That way, nobody's taxes would go UP, but plenty of younger buyer's taxes would go DOWN?

Or does half the joy in getting your Prop. 13 subsidy lie with the fact that you get it, but your neighbors don't? :roll:

DinOR,

IIRC, the reward the IRS offers whistleblowers is somewhere around 10-20% of the amount collected. Perhaps you should go back to those MBs and get some more details.

Robert,

We'll have to agree to disagree on Prop. 13. You're always welcome to come by my place for a beer, though.

I have a neighbor in my building who considered downsizing her place because her husband is no longer there but she also decided not to move because of Prop 13.

Won't Prop 60/90 help?

RC, (who is likewise a friend)

I’ll save some for your discerning palate.

Do you recommend neat, with soda, or some cola?

It is raining, and if I am not mistaken I am "entitled" to some sort of refund.

MtViewRenter,

Oh I'm sure you're right! That's not my style though. Me? I make a list of "dickheads" and I've yet to see someone that's made the list go a full 5 years w/out falling on their OWN sword yet!

The topic has come up before and as much as it bugs me to admit it, most here are probably right. With all of the outright mortgage/appraisal fraud going on out there this sadly comes under "we've got bigger fish to fry"!

That doesn't make it wrong headed thinking though (on the part of the gub'ment). It should've been a MAJOR infraction w/severe penalties. For tax cheats it was great while it lasted but with flat to declining markets for the foreseeable future it won't matter much any more. Again, where's the line between encouraging home ownership and running a tax free biz?

eburbed,

I had to go look up Prop 60/90. I don't think she's 55 yet (if she is I want her surgeon's name). She's CFO of some venture group, so she has probably looked into the tax things pretty thoroughly. I think she's like I am, not exactly cheap, but not into paying for something that is not good value. She has a beautiful apartment that is too large for her, but has decided it makes financial sense not to downsize.

I don't think Prop 13 is fair, and I am benefiting from it on both of my places. I have a friend in Palo Alto who has about a $60,000 property tax basis on a $2 million house (to those outside the Bay Area - it is a NOT gorgeous ranch house in a 1960s subdivision) because his mom bought it new and transferred it to him. My next door neighbor pays four times what I pay for an identical apartment and identical city services. I really don't see how Prop 13 survives the equal protection clause of the Constitution.

@SFWoman,

I really don’t see how Prop 13 survives the equal protection clause of the Constitution.

My extensive and profound understanding of Constitutional law tells me that the "F--k you, I got mine" clause supersedes the "equal protection" clause.

My extensive and profound understanding of Constitutional law tells me that the “F–k you, I got mine” clause supersedes the “equal protection” clause.

Mmmmm sweet delicious hate in the winter as fresh as warm mittens.

As a homeowner, I have benefitted from prop 13. But I also realize that there are certain problems with prop 13 which harming California as a whole, which may come back to harm me, indirectly.

As I said before, in order to get prop 13 amendments passed, you need to get the owners on board. You need to propose something that doesn't harm our interest. You are not going to get ALL owners on board, but you can get SOME.

The biggest problem of prop 13 is forcing one to live in the same house or same neighborhood, especially when the price shoots up ridiculously high. The higher it goes, it more reluctant one is going to move, essentially taking off more supply OFF the market. In a normal market, the higher price will induce higher supply, which will set the market back in balance. In California, it works the opposite way. I was very tempted to sell my residence to bubble-sit, however, unlike Randy H who already upgraded once, and therefore can keep ALL the windfall profit (I assume less than $500K on his second home) on his house, I in fact have made "too much" on my home, which means I will have to pay tax on top of the $500K per couple, and I will have to triple my property tax if I move. So I opted to stay, taking one potential supply of existing home from the market. I am not the only person who went through this thought process, there are other homeowners in the same boat who went through exactly the same process and decided to stay put.

How do we fix it?

For one, I propose resetting prop 13 tax base whenever there is a transaction, including refinancing. Most of the long-time homeowners don't mind this because our home is either paid off, or nearly paid off and we don't use our main residence as ATM. I am all for getting more tax revenue for the county from the ATM home"owners". If someone proposes this amendment, I will endorse it. From a social engineering point of view, we should not encourage people to sit on their fat ass and ATM their home to death anyway. Also, I propose that once you refinanced with equity cash out, when you sell your home, you need to pay capital gains tax from the first $1, not from the $500K, because you are really treating your home as an investment, not as a residence.

Second, instead of prop 60 which allows you to transfer your tax base after you reach 55, I propose that ALL existing homeowners can transfer their existing tax base, if they buy a home of LESS MARKET VALUE of their original home within the next 5 years. This way, you are encouraging more entrepreneurial and risk-taking homeowners to bubble sit. I would love to take my existing prop 13 tax base, sell my home at today's price, and come back to the market in 5 year's time.

Geez don't you hate it when some new fish stirs up the pond? Very interesting reading though, makes my brain hurt. Anyone planning a 30th anniversary prop13 party? Robert's buying...

HARM, thanks for the link.

DinOR,

You're too easy going. Must be the rain up there. Me, I don't mind making a few bucks while helping with the federal deficit. Besides, I'd like to see them fall on their swords a bit sooner.

The rules for taking the exemption are pretty clear-cut. Cases like these are good for those rookie auditors wanting to get their feet wet. No need to call them a tax cheat. Just invalidate the exemptions and forward the case to collections. Takes all of 20 minutes.

We have a few clients audited every year. It's always for some relatively trivial amount of money, and usually because they don't believe the client bought Cisco in 2000 for $100 and sold in 03 for $25. They always want a ton of documentation, which we always have, thankfully, and waste a lot of everyone's time. I'd love to see those IRS guys do some productive work.

eburbed,

not all counties in California honor prop 60 and 90, only some do. Santa Clara county does. However, relatively few seniors are downsizing.

But you see, the reason why lots of seniors are NOT taking advantage of these props to downsize is because of the prop 13 clause which allows their offsprings to inherit the current tax base when they die. The kids of these seniors have all the incentives in the world to keep their parents in their old home, which typically have a much higher market value than the tax assessment base and a much more central location. Also seniors tend to stay close to their doctors whom they've known for many years.

Extending the tax base transfer to the existing home owners regardless of age will be much more effective in encouraging the homeowners to take advantage of price peaks to cash out than the one applied only to seniors. I am in my 30s, and I don't think about passing anything down to my kids yet. People in their 30s and 40s are more willing to move around for profit than people in their 60s and 70s with existing doctor contacts.

OO,

"I in fact have made “too much” on my home, which means I will have to pay tax on top of the $500K per couple"

You know, if you made any capital improvements to the home, that adds to your basis, thus lessens the gain. I don't recall if things like a new roof count, but if you built a new deck, or had a kitchen renovation, a lot of that can be used to negate the gain. You may still pay tax, but it helps with the pain.

Not tax advice. Contact a tax advisor for more details.

For one, I propose resetting prop 13 tax base whenever there is a transaction, including refinancing. Most of the long-time homeowners don’t mind this because our home is either paid off, or nearly paid off and we don’t use our main residence as ATM.

If I were a homeowner, that would not make sense to me.

Why would I vote for something that might screw me over if I ever needed it?

Who knows, one day I might need to buy a pair of Harley's and some stickers that say "LOUD PIPES SAVE LIVES". Then I'd need to refi and extract some of the hard earned equity to buy them.

People do think ahead you know...

SFWoman Says:

> I really don’t see how Prop 13 survives the equal
> protection clause of the Constitution.

Most courts don’t really care about equal protection “or” the Constitution…

I was disappointed when the “conservative” US Supreme court said that it was OK for the University of Michigan to tell Whites and Asians that we may “all be equal” in the US, but they will have to score higher than other students if they want to go to law school at the University of Michigan.

I really don’t see how Prop 13 survives the equal protection clause of the Constitution.

Someone else thought of that -- short version 8-1 Supreme Court (ouch!):

http://www.caltax.org/research/prop13/prop13.htm

Constitutional Validation
Almost immediately after passage, the California Supreme Court sustained Proposition 13's constitutionality in the Amador case (Amador Valley Joint Union High School District v. State Board of Equalization. September 22, 1978). After a series of legal challenges in the 1980s, the issue of acquisition-value assessments reached the U.S. Supreme Court in Nordlinger v. Hahn. In a stunning 8-1 decision, the court in 1992 upheld California's acquisition-value system.

The court also opined that a state has a rational interest in neighborhood preservation, continuity and stability, and that Proposition 13's system of "locking in" lower tax assessments contributed to such preservation.

It's a good point. If you don't like Prop 13, don't buy here.

Speaking of taxes - NYC is looking at cutting sales tax on clothing. Woot!

Now there's incentive to move there... (of course clothing was always sales tax free in NJ... but Paramus was always too far for me.)

Is Ben's blog down ?

eburbed,

not refi for lower points, I don't want to get hosed on that, if one day there's a 0.2% 10 year fixed, I would like to take advantage of that. Refi for equity extraction? Oh I can tell you I won't need it, ever.

People who need equity extraction should not be buying home in the first place. Or alternatively, you can set a limit. Homeowners are allowed one time tax-free equity extraction.

This is a measure that you will get some financially more established homeowners on board. People I know with personal finance squared away would love to see the FBs screwed.

People who need equity extraction should not be buying home in the first place. Or alternatively, you can set a limit. Homeowners are allowed one time tax-free equity extraction.

This is a measure that you will get some financially more established homeowners on board. People I know with personal finance squared away would love to see the FBs screwed.

Why the hate?

Like anything else, it's a pretty interesting gamble. There are pros and cons.

For many years it's worked out that refi can be a sustainable second income. But sometimes the music stops and then you're screwed.

If you're willing to take that bet, then go for it.

Randy H Says:
Then DS posited some other points, none of which address this very fundamental question, which FAB pointed out:

What *exactly* is the logical difference between owning your land and merely having the right to “use” your land? If I own land that I am prohibited from using, doesn’t that reduce its real value to zero? Conversely, if I have an indefinite lease on land that I am free to use at my discretion, doesn’t it acquire the same value as land I might instead own?

It's actually 3 questions, but I hadn't really read them, to be honest. The point's been made before in another thread (by myself in fact) that 'fee simple' title has become an illusion of allodial title in the public mind. Allodial title is marked partially by the fact that it is impossible to levy taxes on it, as it is owned by the sovereign or state or similar. Anyhow. There is still a common distinction in English residential property title of freehold vs leasehold title, where you buy into a leasehold title that might be limited to 99 years, only to forfeit it to the owner at the end, and often costing as much as freehold. Understandably, this is not very a popular idea with people, but they are a common feature nonetheless. Speedingpullet et al may be able to cast more light on the ins and outs of this form of title, as I haven't needed to consider property transactions like it when living in the UK. The leasehold idea though runs counter to my suggestion to continue to own the rights to land, but to keep the value low somehow, more or less by preventing bidding in the market place, I guess. And leasehold represents a reversion to feudal arrangements.

I suppose I am positing an extrapolation or reversal of the land price bubble by going to the opposite logical extreme of imagining ordinary land to have little or no monetary value ascribed to it. This is following in the footsteps of George, and for much the same reasons. However, after more reflection, although we commonly ascribe location value to land, I am wondering whether there should be a separate 'location' value split out on land in a valuation, rather than rolling it into the so-called 'land value'. e.g. land of 1/4 acre or 1/2 acre anywhere has a reasonably low nominal value because you can build on it (and an infrastructure value if it has services to it). It then has an extra 'location' value, such as being in Beverly Hills, or having water views or prestigious neighbours. The housing boom has seen any house on the coast or near a city go up in location value. The challenge in deflating a bubble is then to deal with the location bubble. (I don't think this is just semantics, but it doesn't point to a solution either.)

Interestingly, so-called 'geolibertarians' are generally influenced by Georgism, but the ideas behind it pre-date Henry George, and can be found in different forms in the writings of John Locke, the French Physiocrats, Thomas Jefferson, Adam Smith, Thomas Paine, James Mill (John Stuart Mill's father), David Ricardo, John Stuart Mill, and Herbert Spencer. However, they also probably did not anticipate the concept of Malibu Beach or water views.

Will these ideas create a society that looks like this?