Should we sell our home and pay $300,000 Capital Gain when our neighbor, a current surviving spouse, doesn’t pay any taxes?
30 Years of Prop 13 with no end in sight My wife and I raised our five children here in Santa Clara County, California. There were close to 25 children on this street of 10 homes that dead-ends into a culdesac. Our children and their friends played a modified game of baseball in the front yard until they got big enough to break windows.
Today, our street is down to four young children and five original homeowners whose average ages are close to 80. Five of the families have resided over 45 years and pay a total of $10,800 annual property taxes, while the other five pay a total of $124,000. The neighborhood is no longer homogeneous and will stay that way for the foreseeable future. As a result, the state runs a deficit of $16 Billion. Our upscale small city answers with a parcel tax to take care of the short fall to pay for teacher services. Less affluent school districts, who receive property tax revenue from middle to upper class neighborhoods, are not so fortunate.
Property values have escalated beyond any experts belief after Prop 13 came into homeowners lives in 1978. A message to Governor Jerry Brown, who was against it, that all home and commercial property values would be backdated to 1975 and couldn’t be raised more than 2% a year. This locks people into their homes and commercial property, reducing inventories in middle to upper class neighborhoods.
It’s not just Prop 13 that keeps people in their homes as they get older. Capital gains of 24.3% (Fed 15% & CA 9.3%) is a steep tax in your old age, despite a $250,000 per person exemption. There are millions of homeowners (not just seniors) that are financially locked in their homes because of these two pieces of legislation.
Then there is the ultimate benefit for those getting closer to their mortality: forgiveness of all capital gains on all assets when the current surviving spouse sells all their assets. This is very special Federal legislation that pre-dates World War I. It’s part of the revenue code that gives a ‘Step-Up-Basis-At-First-Death’ with no Federal Estate taxes due until the second death. So, there are elderly California couples who have to sell and pay Capital gains based on legislation meant to tax couples worth over $4 million at the second to die. Does that make any sense?
The result is those individual five families who pay less than $2,200 per year in property taxes will stay put. The combined equity tied up is close to $13 Million. Lost property tax revenue is estimated at $150,000 annually from five (5) homes. The Feds and State lose out on Capital gains completely and property tax revenue until a surviving spouse sells their home.
The Solution – Allow all US seniors over 65 to sell their homes when they want to move on without paying Capital gains. It’s a win for seniors, the less affluent schools and cities with structural revenue deficits. In addition, it will positively affect the states, and lastly it will help fund teachers, police and fireman retirement funds that are currently under-funded at the State level and many cities as well.