Taxpayer Relief Act of 1997

From Wikipedia, the free encyclopedia

The Taxpayer Relief Act of 1997 (Public Law 105-34) reduced several federal taxes in the United States.

Subject to certain phase-in rules, the top capital gains rate fell from 28% to 20%. The 15% bracket was lowered to 10%.

Starting in 1998, a $400 tax credit for each child under age 17 was introduced, which was increased to $500 in 1999. This credit was phased out for high income families.

The act exempted from taxation profits on the sale of a personal residence of up to $500,000 for married couples filing jointly and $250,000 for singles.

The $600,000 estate tax exemption was to increase gradually to $1 million by the year 2006.

Family farms and small businesses could qualify for an exemption of $1.3 million, effective 1998. Starting in 1999, the $10,000 annual gift tax exclusion was to be corrected for inflation.

The act also provided tax relief for education savings and retirement accounts. Some expiring business tax provisions were extended.

It was signed into law by President Bill Clinton on August 5, 1997.

Legislative history

This was the first law devoted solely to tax cuts that Congress enacted using the fast-track budget reconciliation process.

Final House vote, July 30, 1997:

Vote by Party	Yea		Nay
Republicans	225	99.6%	1	0.4%
Democrats	164	80.0%	41	20.0%
Independents	0	0.0%	1	100%
Total	389	90.0%	43	10.0%
Not voting	2		1

Final Senate vote, July 30, 1997:

Vote by Party	Yea		Nay
Republicans	55	100%	0	0.0%
Democrats	37	82.2%	8	17.8%
Total	92	92.0%	8	8.0%

ELIMINATE FEDERAL AND STATE CAPITAL GAINS FOR SENIORS WHO SELL THEIR HOMES

Are we going to live with Prop 13 in the current form or are there other possibilities? The current administration is talking about raising Federal capital gains taxes to 20%. When combined with California’s 9.3% comes to a total close to 30% depending on your tax bracket.

Does it make sense that on the same street in hundreds of California neighborhoods, one resident pays $1,500 in property taxes while the owner of an identical house pays $15,000, thanks to Prop 13? The $1,500 taxpayer owner can best be described as over 62. A high percentage own their home free and clear, especially super seniors over 70. The $1,500 taxpayer has a whole host of complex choices whether to sell and move on, especially super seniors over 70. They have very strong incentives to stay which limits the states ability to raise property taxes more than 2% per year. They are:

1. Facing large capital gains over $250,000 per person exemption whether they sell outright or move to a less valuable home: Federal 15% and California 9.3%.
2. Increased property taxes unless they move to a few counties that accept the exchange. Proposition 60 allows seniors to move within their county to a property of equal value or lesser value and transfer their low tax base to that new property. Lesser value triggers a capital gain. The same holds true for Prop 90: purchasing down triggers a capital gain for everything over the $250,000 per person exemption. Both of the propositions have failed to increase senior mobility. Capital gain at 24.3% is too much to overcome.
3. Facing large fees to get into some retirement homes, plus monthly charges.
4. While an elderly couple pays the full capital gains when they move, a current surviving partner pays no capital gains tax on a sale following the death of his or her spouse.

The home is reassessed on a “stepped-up” basis. Take a home purchased for $15,000 in 1965 and sold for $1.5 Million in 2008. A current surviving spouse pays no tax while a couple selling would pay as much as $250,000 depending on improvements. A huge disincentive to sell.

1. Hit by market downturn and low interest rates on savings.
2. Fixed incomes

There is no need for those with 401k’s retirement plans at work or retirement to tell us they haven’t taken a serious hit the past year. There is no guarantee the market will be back in the near future. For seniors, the prospect of additionally losing 24.3% of the appreciated capital value of their homes is unacceptable, so they stay put. There is the case for allowing seniors over 62 to be able to sell their home tax-free: Help with their retirement; give their children some of their future inheritance early; and set-up educational trusts for their grandchildren. This solution is a better way to reasonably ensure that a lifetime of savings can’t be undone by forces beyond one’s control and a confiscating tax structure. These benefits could be realized without changing Prop 13.

For the state and local communities, it’s a win since many of those homes are protected by Prop 13, the new owners would not be based on a new purchase price. Increased property tax revenues will offset loss due to elimination of capital gains. It’s a win for:

1. schools, teachers and students – we know property taxes will be off.
2. county tax assessor
3. baby boomers approaching retirement who took a hit on their 401K
4. banks financing quality real estate mortgages, plus increased deposits from seniors unlocking their equity.

The legislature needs to find partial long-term (5-10 years) solutions examining the tax code. The capital gains current exemption, $250,000 per person when selling a family residence, has not been increased for 12 years (TR-97). It needs to be eliminated to match the Federal ‘Step-Up-Basis-At-First-Death’ law to stimulate quality home real estate sales and restore tax fairness. In addition, seniors should be able to downsize and move to any county without a property tax increase. This stimulus package will take time, but it will work once the banks get back to lending to qualified buyers and some order returns to the stock market.

Our recommendation is not an effort to reward an older special interest group. This is a real estate stimulus solution that gets around the Prop 13 limitations and will structurally increase property taxes over the next 5-10 years.

James U. Hall is the former president of the Santa Clara County Chartered Life Underwriters Society, General Agents and Managers Association. His blog is http://jameshall.wordpress.com/. John E. Upton was a supervisor of El Dorado County Board of Supervisors from 1990 to 1998, and the former president of the California State Association of Counties.

Article posted in Mercury News on 8/30/2008

Opinion: Proposition 13 has caused many problems

By JAMES U. HALL and JOHN E. UPTON
Special to the Mercury News

Article Launched: 08/30/2008 08:40:46 PM PDT

A recent Field poll of Californians indicated substantial majorities had a positive view of Proposition 13, the law that severely limits property tax increases except when real estate changes hands. This poll was like asking people if they would like to see their taxes increase, without pointing out what the additional government revenue might be used for, or what the unintended consequences of Proposition 13 have been.

No mention was made that California now spends less than half of the amount per pupil on its public schools than New Jersey. The shortfall in funding can be traced largely to Proposition 13.

The great resulting tax disparity can be found locally. On a West Valley cul-de-sac sit 11 homes. Six families are pre-Proposition 13 taxpayers who pay a total of $14,200 worth of annual property taxes. The other five pay $125,000. The average age of six original owners is 77, whereas the average age of the other five is 50.

Most people are unaware that, in addition to protecting single-family residential property from sharp property tax increases, Proposition 13 also shelters industrial and commercial property. In general, property owned by a corporation or partnership will not be reassessed until more than 50 percent of the ownership of the corporation or partnership changes hands. Careful planning can avoid such ownership changes for many decades, even after some of the shareholders or partners die.

Even more startling, if real property was owned by a corporation or partnership before the passage of Proposition 13, it will never be reassessed, barring a sale, unless there is a shift of control of the corporation or partnership to a single individual or a single entity. That means, for example, that property owned by PG&E prior to Proposition 13 will essentially never be reassessed, since no one person or entity is likely to ever gain control of PG&E by owning more than 50 percent of its stock.

Proposition 13 has caused a steady shift of the property tax burden from commercial and industrial property to residential property. Commercial and industrial property is even more likely than residential property to be locked into pre-Proposition 13 assessments. Seniors who want to move to a less expensive home generally face a steep increase in property taxes, which causes them to stay where they are. This locks in outdated assessments, thus denying the community the additional tax revenues that would be paid by a new homeowner.

This works to the advantage of neither the elderly nor the community. State and federal tax laws, when combined with Proposition 13, discourage millions of homeowners, especially seniors, from moving. Homeowners are entitled to a $250,000 per person exemption when they sell their home. However, on sales above that amount, they pay a 15 percent federal and a 9.3 percent state capital gains tax. Seniors pay it wherever they move, even to assisted living units, where there are often heavy up-front fees.

The death of a spouse also creates a disparity in tax treatment. While an elderly couple pays the full capital gains when they move, a surviving partner pays no capital gains tax on a sale following the death of his or her spouse.

The home is reassessed on a “stepped up” basis. Take a home purchased for $50,000 in 1965 and sold for $2.5 million in 2008. A current surviving spouse pays no tax while a couple selling would pay as much as $500,000, depending on improvements. This step-up provision is an enormous additional disincentive to move for those seniors who are aware of it. For those who aren’t, their ignorance creates a huge inequity. Assisted living facilities are full of elderly who paid capital gains plus a large up-front fee to get into a retirement home, then find themselves in a financially-vulnerable position.

We suggest three solutions:

Seniors over 65 should be allowed to move anywhere in California without paying increased property tax, as long as they are moving to a less expensive residence.

Proposition 13 protections should be gradually removed from commercial and industrial property, increasing funding for schools and stopping the property tax burden from shifting to residences.

Capital gains taxes should be eliminated for sale of a home by seniors over 65.

 

·  Capital gains taxes should be eliminated for sale of a home by seniors over 65.

Comments published in Mercury News

Here is a link to our comments that were published in the Mercury News letters section about how Senator McCain is right about lowering capital gains, even in a down market.

http://www.mercurynews.com/letters/ci_10750310?nclick_check=1

Jim

Senator McCain is right

Senator McCain is right

 

John McCain is proposing to cut the federal capital gains rate to 7.5% from 15%.  Mr. Obama responds that no one has capital gains to tax.  There are millions of California homes that could be for sale early if California would eliminate or reduce the capital gains rate of 9.3% to serve as an incentive to sell.  Senator McCain is right that lowering the after tax return on capital still makes sense in a down market.  Increased sales in upper middle to upper class neighborhoods would structurally increase property taxes.  The current political focus is on the stock market meltdown.  Upper-middle class homes are affected but not seriously by the subprime debacle.  These are under-performing revenue assets.  The combined state 9.3% and federal 15% capital gains need to be reduced to create a structural increase in property tax revenue here in California.

 

James Hall

 

 

 

 

Opinion section in Mercury News

Our piece has been put into the opinion section of the San Jose Mercury News.  Thanks to everyone who helped on it.

Here is the link: http://www.mercurynews.com/ci_10346672?IADID=Search-www.mercurynews.com-www.mercurynews.com

We encourage you to leave comments.

Jim

Proposition 13- Unintended Consequences

A recent Field poll of California citizens indicated substantial majorities had a positive view of Proposition 13, the law which severely limits property tax increases except when real estate changes hands.

This poll was like asking people if they would like to see their taxes increase, without pointing out what the additional government revenue might be used for, or what the unintended consequences of Proposition 13 have been. For example, no mention was made of the fact that California now spends less than half of the amount per pupil on its public schools than New Jersey, the California public schools generally have serious problems, and that the shortfall in funding can be traced largely to Proposition 13.

The great resulting tax disparity can be found in a middle upper class neighborhood here in Northern California. On a Monte Sereno dead-end cul-de-sac sits eleven homes. Six families are pre-Proposition 13 taxpayers that pay a total of $14,200 worth of annual property taxes. The other five pay $125,000.

Most people are unaware that, in addition to protecting single family residential property from sharp property tax increases, Proposition 13 also shelters industrial and commercial property. Generally speaking, property owned by a corporation or partnership will not be reassessed until more than 50% of the ownership of the corporation or partnership changes hands. Careful planning can avoid such ownership changes for many decades, even after some of the shareholders or partners die. Even more startling, if real property was owned by a corporation or partnership prior to the passage of Proposition 13, it will never be reassessed, barring a sale, unless there is a shift of control of the corporation or partnership to a single individual or a single entity. That means, for example, that property owned by PG&E prior to the Proposition 13 passage will essentially never be reassessed, since no one person or entity is likely to ever gain control of PG&E by owning more than 50% of its stock.

All of this means that there has been a steady shift of the property tax burden from commercial and industrial property to residential property, while at the same time our schools have been starved of revenue.

Other tax laws significantly increased the unfortunate effects of Proposition 13. For example, except among tax lawyers and accountants, there is little or no awareness of the effect of the capital gains tax. The capital gains tax of course tends to discourage sales of property, which means that real estate changes owners less often, and is reassessed less often. If Proposition 13 were not in effect, there would be no impact of the capital gains tax on property tax revenues.

The effect is significantly increased by the fact that any property owned at the date of a person’s death is thereafter treated, for income tax purposes, as if it had a cost equal to its fair market value on the date of death. This wipes out the capital gains tax on any sale after death. It creates a significant incentive to hold on to property.

However, in California, and other states that have the concept of “community property” between husband and wife, any property that is community property receives a full new tax basis, wiping out capital gains tax, when either the husband or the wife die. A single individual might find it necessary to sell, if there were a need to move to assisted living or have access to the equity in the home. A married couple, however, has all the advantages of a sale without capital gains as soon as one of them dies. Beyond the obvious unfairness that this creates with respect to community property v. separate property, married individuals v. single individuals, etc., it makes the real estate market even less liquid by encouraging married couples to delay any sale, and thereby increases the negative impacts of Proposition 13.

Tax inequities amongst Seniors

Selling Your Home (Click on the link to see a comparison of two couples selling their home, one paying no Capital Gains tax and the other paying several hundred thousand dollars.)

Prop 13 is still Popular, 30 Years Later

Note: Image posted in Sacramento Bee on June 6th, 2008 in the article Prop. 13 still liked, California Poll finds by Andy Furillo.

Neighborhoods dealing with Prop 13 and Capital Gains

 

Neighborhoods

 

We’ve lived in a middle upper class Southbay neighborhood for 43 years.  The street has 10 homes which ends in a cul-de-sac.  Five are original Prop 13 beneficiaries.  A neighbor passed away several years ago and his wife sold their home one year later.  Two of the remaining Prop 13 beneficiaries are long-term widows.  The other three are surviving couples all in their late 70’s and early 80’s.  The other five homes have turned ownership several times, but have stayed steady for the last 5 to 10 years. 

 

Tax Legislation

 

The newer homebuyers (last 10 years) on the street by any measure (average age 45 to 55) are very successful.  Their homes have appreciated substantially over and above the $250,000 per person exemption.  They won’t move up or down because of Capital gains and a Prop 13 increase.  They have the same problems as the original Prop 13 beneficiaries.  In a sense, they are locked in more than seniors.  All 10 homes are currently locked-in because of anyone of the three pieces of legislation.  

 

Property Tax Discrepancies

 

The property taxes paid by the original Prop 13 beneficiaries on the block are $12,200.  The five homes that have changed ownership provide close to $125,000 in taxes.  They need tax relief.  The homes that were purchased for $40,000 to $50,000 in 1962 are all worth over 2-million-dollars and much more.  The neighborhood is all but void of young people: and, not buyer friendly for the foreseeable future. 

 

Our neighbor’s surviving spouse sold their home for over 2-million-dollars in 2002 and paid no Capital gains.  They paid no Capital gain because of the little known piece of legislation referred to as the ‘Double-Step-Up in basis at first death’.  It is part of the Federal Estate tax code that allows all current surviving spouses to sell all their assets (commercial property and securities) paying no Capital gains taxes at any age. 

 

Furthermore, a $1,700 property taxpayer was replaced by one that pays over $25,000.  This could happen over and over if we encourage Seniors to sell by changing State and Federal legislation.

 

Tax Fairness – Allow Seniors (62-65) to sell Tax Free

 

Our neighbor died at age 78: the problem of tax fairness surfaces. (See illustration below) 

 

 

 

 

 

 

Example:  Purchase a home worth $40,000 in 1962.  Selling price is $1,800,000 in 2006

 

Surviving Spouse after receiving ‘Step-Up’	Senior Couple
Selling price is $1,800,000 in 2006 after one death.	Selling price is $1,800,000 in 2006 for a couple.
Property gets a new ‘Step-Up’ to   $1,800,000. (No Capital Gain)	Estimated tax for a couple selling in a home of the same value is $350,000 to $400,000.
Tax Fairness	No Tax Fairness

 

 

Why not allow long-term surviving spouses and couples sell their homes without paying Capital gains?  Why should a tax law (Federal Estate taxes ‘Step-Up’ basis Provision) meant to tax people worth more than 2-million-dollars when they die, affect Capital gains taxes for current surviving couples, when they sell their highly appreciated home?.

 

Federal and State Capital gains here in California (24.3%) becomes a dis-incentive to sell, especially for the people over age 65 on fixed incomes under the benefits of Prop 13.  It’s hard to believe that those seniors are trapped in their homes, but that is the case.  The ‘Step-Up’ allows the current surviving spouse to avoid the gain that might amount to $300,000 to $500,000 and more.

 

Conclusion

 

Our recommendation would do the following:

• Free up dead capital for retirees, possibly billions over time.
• Increase property tax revenue over time for the State and Education
• Possible tax relief for current property taxpayers
• Protect seniors who desire to stay and keep current Prop 13 status and allow them to sell when they want to
• Less dependence the State has on sales tax increases
• Help offset the loss of revenue from recent foreclosures

 

Our recommendations are one way around the negative side-effects of Prop 13.