Prop 13 Tax Base Transfer

[atkinson40]

Jurisdiction

California

Does prop 13 tax base preservation only work on a principle residence?

I want to move from my current residence back into a rental for at least 2 years to take advantage of the $500K capital gain exclusion on the rental.

While I am living in the rental I may prepare and sell my current residence and take advantage of the above exclusion on it also. I have lived here the required 2 out of 5 years to do this.

If I buy a new house can I transfer the prop 13 base from the house I now live in to the new property? Or not because I will be living in the rental and claiming it as my new residence.

Or must I wait to buy a new property until I sell the rental and use its prop 13 base for the new house.

Thanks. Kevin

 

[Tax Counsel]

Does prop 13 tax base preservation only work on a principle residence?

I want to move from my current residence back into a rental for at least 2 years to take advantage of the $500K capital gain exclusion on the rental.

You won't get the full $500K exclusion for living in the rental for just two years. And there are potential depreciation recapture issues, too. And, of course, you must be married filing a joint return to get the $500k, otherwise you are limited to $250K.

While I am living in the rental I may prepare and sell my current residence and take advantage of the above exclusion on it also. I have lived here the required 2 out of 5 years to do this.

Similar problems with the sale of your current residence. I suggest you read IRS Publication 523 carefully and crunch the numbers in the worksheets it has so you know exactly what gain exclusion you can expect to get, and do that before you make these changes. CA income tax rules on the sale of a residence closely follow the federal rules, so apply your CA tax rate to the results to estimate your state income tax impact.

If I buy a new house can I transfer the prop 13 base from the house I now live in to the new property? Or not because I will be living in the rental and claiming it as my new residence.

I don't practice in CA and don't know all the details of the property tax rules in that state. A lot will depend on what basis you are using to claim the transfer of the tax value (e.g. over 55 or whatever) and the price of the new home compared to the old one. It does appear, however, that you need to be eligible to claim a homestead exemption for the new home when you buy it, which would mean you need to start using it as your residence from the date of purchase. You'll want to confirm that with a tax professional in CA who handles real estate taxes as that state's real estate tax rules get complex. Indeed, you should review the income tax consequences with a tax professional as well before you start this. Getting it wrong can cost far more than you pay in fees for good tax advice.

 

[atkinson40]

Thank You Tax Counsel

You won't get the full $500K exclusion for living in the rental for just two years. And there are potential depreciation recapture issues, too. And, of course, you must be married filing a joint return to get the $500k, otherwise you are limited to $250K.

I've read IRS Publication 523 and know that the only non-qualified years for the rental will be between 2009 and 2019 or 10 years out of the 32 I've owned the property or 22/32 X $500000.

Similar problems with the sale of your current residence. I suggest you read IRS Publication 523 carefully and crunch the numbers in the worksheets it has so you know exactly what gain exclusion you can expect to get, and do that before you make these changes. CA income tax rules on the sale of a residence closely follow the federal rules, so apply your CA tax rate to the results to estimate your state income tax impact.

It is my current understanding of IRS Publication 523 that because I have owned and lived in my current residence for the entire 25 years I've owned it, I can claim the full $500000 exclusion.

I don't practice in CA and don't know all the details of the property tax rules in that state. A lot will depend on what basis you are using to claim the transfer of the tax value (e.g. over 55 or whatever) and the price of the new home compared to the old one. It does appear, however, that you need to be eligible to claim a homestead exemption for the new home when you buy it, which would mean you need to start using it as your residence from the date of purchase. You'll want to confirm that with a tax professional in CA who handles real estate taxes as that state's real estate tax rules get complex. Indeed, you should review the income tax consequences with a tax professional as well before you start this. Getting it wrong can cost far more than you pay in fees for good tax advice.

I'm not sure about a "homestead exemption". I have not read anything in the literature about this. But I will consult a real estate attorney along the way. But I still like to educate myself along the way.

You won't get the full $500K exclusion for living in the rental for just two years. And there are potential depreciation recapture issues, too. And, of course, you must be married filing a joint return to get the $500k, otherwise you are limited to $250K.

I'm aware of the depreciation being taxed at 25%.


I must not have been clear. I understand the $500000 exclusion rules.

What I don't understand are the yearly, California specific, Property Tax issues. I pay these based on the price I paid for the properties. Not the current value of the properties. You can transfer this California Property tax to a new property.

I paid $75000 for the rental and $200000 for my current residence. These are what my California Property taxes are based on. The rental is now worth $600000 and my current residence is worth $1.7 Million. I could not afford California Property Taxes based on either of these values.

Back in the 70s elderly individuals were loosing their homes because they could not afford the California Property taxes based on the then current values of their homes which went up every year. Tax payers revolted and Prop 13 came about that fixed the property tax based on last sales price, not current value.

My question was how to preserve on or the other of the above bases when I buy a new property.

 

[flyingron]

It's not a statewide thing. How old are you? What county are you in? What is the FMV of the two properties in question?

 

[atkinson40]

It's not a statewide thing. How old are you? What county are you in? What is the FMV of the two properties in question?

Thank You flyingron

I think Prop 13 is a statewide thing.

1978 California Proposition 13 - Wikipedia

I am 66 and in San Diego County. FMV of rental is $500000. FMV of current residence is $1.5 to $1.7 million. Both properties are paid for.

This is the Prop 13 base value preservation I am speaking of.

Proposition 13 Base Year Value Transfers to Replacement Properties

I can only do this once. I think it would be best to preserve the base on the rental as it is the lower of the two, but I believe the replacement property must be if a lower value than the property it is replacing. I will not be able to find a suitable property for less than $600000 in San Diego.

So I would need to move to the rental for 2 years to take advantage of the $500000 capital gains exclusion on that property.

Then move back into my current residence to take advantage of the $500000 capital gains exclusion and preserve the prop 13 tax base on that property. I think I can find a suitable new residence for less than $1.5 to $1.7 million.

Note that my residence worth $1.5 to $1.7 million is not in an upscale neighborhood. It is in a desirable middle class neighborhood. Housing costs here have gone crazy.

I want to downsize to a townhouse or condo with no yard and no pool. I don't need the use or upkeep of these anymore.

 

[Tax Counsel]

It is my current understanding of IRS Publication 523 that because I have owned and lived in my current residence for the entire 25 years I've owned it, I can claim the full $500000 exclusion.

Yes, assuming that you sell the home at the time you move to the rental, and assuming you are married and will file a joint return. If the home sits vacant for awhile while you live in the rental, however, your exclusion amount will start going down.

I must not have been clear. I understand the $500000 exclusion rules.

I wanted to be sure of that, because I've seen taxpayers who thought they knew the rules and screwed it up, costing them in some cases tens of thousands of dollars in tax that they'd not have paid if they knew what they were doing.

I want to downsize to a townhouse or condo with no yard and no pool. I don't need the use or upkeep of these anymore.

I can understand that. Pools in particular can be a pain to keep up, and if you don't get a lot of use out of it, that effort just isn't worth it. At least in a lot of places in CA you can use a pool all year around. Where I live, an outdoor pool is only really fun to use for about 3-4 months out of the year. I always wonder why people in my area want to put in a pool for that small amount of time. The pool certainly doesn't help to raise the sale value of the property around here.

 

[atkinson40]

Yes, assuming that you sell the home at the time you move to the rental, and assuming you are married and will file a joint return. If the home sits vacant for awhile while you live in the rental, however, your exclusion amount will start going down.

I can only use the exclusion once every 2 years. I can only use it for my primary residence at the time of sale. I want to use it for both the properties. Yes Married/Joint.

I can also only use the prop 13 property base transfer once and it needs to be on my primary residence. I need to make sure that once I sell both properties, that my new residence is where I want to live for the rest of my life.

Property tax is roughly 1% per year of the last sale cost in California. It goes up a tiny bit every year but not much. If I somehow lost my current prop 13 tax base, I could end up paying %1 of maybe a million dollars($10000) every year on my final residence. That's if I could find a 1 million dollar property that is suitable.

I know these numbers sound big, but the average price of a home in San Diego is $800000. Where I live the average is around 1.5 million. They get listed for 1.2 million and bidding wars drive the sale price to around 1.5 million.

My current residence needs work to make it ready for sale. I will remodel the interior after I move to the rental. I will not sell my current residence unless I find a suitable replacement for the amount of proceeds from my current residence.

If I cannot find a replacement, I will spend 2 years at the rental and move back into my current residence. The neighborhood is nice. I'm just too old to want to spend time and money on a pool/yard. The pool is huge (25' x 50') and I have not been in it in over 2 years The property is almost an acre.

If I end up moving back to my current residence, I will pay to have the pool removed and convert the yard to some type of low maintenance and low water replacement.

Thanks Tax Counsel

 

[flyingron]

Prop 13 is a statewide thing, and if you both properties were in the same county, there's no problem. Not all counties will allow an intercounty base value transfer however. If you buy in San Diego County you're OK, but Alameda, LA, Orange, Riverside, San Bernadino, San Mateo, Santa Clara, Tuolumne, and Ventura are OK as well.

The next issue is that on Prop 13, the property you're transferring has to be of lesser FMV (the actual FMV, not the artificially low prop13-limited value). Capital gains basis/exclusion/etc... have no bearing on this.

You have to be moving from a house you resided in for two years to a new primary residence.

 

[atkinson40]

Prop 13 is a statewide thing, and if you both properties were in the same county, there's no problem. Not all counties will allow an intercounty base value transfer however. If you buy in San Diego County you're OK, but Alameda, LA, Orange, Riverside, San Bernadino, San Mateo, Santa Clara, Tuolumne, and Ventura are OK as well.

The next issue is that on Prop 13, the property you're transferring has to be of lesser FMV (the actual FMV, not the artificially low prop13-limited value). Capital gains basis/exclusion/etc... have no bearing on this.

You have to be moving from a house you resided in for two years to a new primary residence.

Thanks Flyingiron

Rental:

I'm not trying to save the prop 13 base on the rental. I'm just moving there to get the capital gains exclusion. I don't want to be a landlord anymore.

Current Residence:

This is where I will need to move back to regardless if I sell it or not. I need to be there 2 years to again take advantage of the capital gains exclusion.

I don't want a pool. We live about 2 miles as the crow flies from the ocean. Night and morning low clouds keep the pool to cold for swimming except for about 4 months out of the year. (even for little people). In addition there is about 1 to 1.5 inches of evaporation in the summer. With the water shortage in California, this is going to get more expensive. Chlorine has doubled in cost over the last year. The pool is also an insurance liability. If I paid someone to do the pool maintenance, it is way over $100 a month.

In the future, I'm betting given all this, a pool will detract from the property value.

I now have 4 BR. I only need 3, but I sac tolerate 4 if I end up staying in my current residence.

I also don't want an acre of land. A patio would be enough for me.

It may be cheaper for me to just remove the pool and change all the landscape to low maintenance and low water.

I've made up an excel spreadsheet to run the numbers and it looks like State/Federal capital gains, (even given the $500K exemption), plus realtor commissions and closing will run me about $200K for my current residence.

I Googled "Pool Removal Cost" and it comes out to be about $20K. I'll get estimates for the pool to be removed and the landscape redone. I may just use the 2 years I'm at the rental to remodel my current residence and do the pool/landscaping and move back and stay when I've sold the rental. The remodeling I want to do should not be over $40K. Maybe pool, landscaping and remodel for under $100K.

The remodel is only changing a tub to shower, painting the interior. replacing a sliding door, and laying down some vinyl planks in one room and a hallway.