Proposition 13 Tax Revenue/Increase Without Changing Legislation

Capital Gains Inequities Among Seniors and partial revenue solutions to property inequities.

Prop. 13 Tax Revenue/Increase Without Changing Legislation

Capital Gains Inequities Among Seniors

Why do some seniors pay huge capital gains when selling their homes while others pay nothing? The reason is a little known part of the 1981 Federal Estate tax legislation referred to as the “Step-Up-In-Basis-At-First-Death.” This provision means that a current surviving spouse can sell their home for any price with no tax obligation at all. Contrast that to a senior couple across the street that will have to pay a 24% capital gains tax on all gain above the $250,000 per person exemption. In many neighborhoods, that can now amount to a tax of $300,000 and much more on the couple, while the current surviving spouse can make the same sale and move on with no tax obligation at all.  Property taxes among neighbors can vary: $2,000-$36,000 per year for the same value homes in upper middle class neighborhoods. A partial revenue solution to property tax inequality (Prop 13) would be to give equal treatment to senior couples and surviving spouses, at least with respect to real estate home sales. The long-term effect of the existing Federal Estate tax legislation is to create an increasing financial incentive for seniors to stay where they are and hold property until a death occurs. It leads to limited inventories, lower potential property tax revenues in older neighborhoods and ultimately higher prices for residential and commercial real estate.

Are State (Prop 13) and Federal Estate Tax Laws limiting home inventories for sale, resulting in a permanent commitment to higher prices and unfair capital gains treatment between surviving spouses and senior couples selling their homes?  The solution may be federal legislation to eliminate capital gains for seniors by eliminating the current 250,000 per person exemption Capital Gains Tax. The positive side effects of allowing seniors (age 65) to sell their homes and personally owned commercial property capital gains tax-free are as follows:

  1. Help relieve the Proposition 13 constraint upon real estate sales, and as a result develop more property tax revenue without changing the Proposition 13 legislation.
  2. Schools should be the #1 beneficiary of increased property tax revenue.
  3. It is fair to all seniors age 65 and older by giving all equal financial options.
  4. It should increase the inventory of real estate, making the market more competitive.
  5. It will increase local tax revenues, because under Proposition 13, the property tax base increases by only 2% per year, unless real property is sold, at which point it increases to current market value. Seniors selling tax free will bring in a current market price taxpayer, and raise the property taxation base to current market value.
  6. It frees up dead equity capital and moves some of it into the free market.

A further point is that this step up provision doesn’t only apply to homes. The ‘Step-Up’ applies to both halves of the entire estate. This includes commercial property, stocks, bonds – everything. This is clearly special interest legislation for the very rich to eliminate Capital Gains and exempts all surviving spouses in the

The vast majority of Californians owning homes don’t think Estate Tax legislation applies to them. They are wrong. It applies to millions of homeowners in
California and in other parts of the country, who may need to sell and realize gains in excess of the $250,000 per person exemption. They aren’t rich and many can’t afford a huge tax at sale. There are an increasing number of neighborhoods where properties have appreciated more than the current $250,000 per person exemption, yet the tax only impacts the couple who must sell, not the current surviving spouse at any age. A real solution to Prop 13 must be revenue driven.
James U. Hall, CLU, Monte Sereno


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