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 https://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.

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