2018 homeowner tax guide: keep your base rate when selling (prop 60/90), Tax reform and deductions
Now that the New Year’s hangover has worn off, we come to the quick realization that tax time is upon us. Here is the latest on property taxes, deductions and changes to the tax laws affecting Pasadena homeowners.
Let’s go through some of the hot topics that you may or may not be aware of:
Transferring Your Tax Base When Selling Your Home
At the time of purchase, California homeowners establish their homes property tax rate base. This amount is 1% of the purchase price. As the years go by, property taxes can increase if the assessed value of the home increases, however, thanks to Proposition 13, a law approved by California voters in 1978, this amount cannot increase by more than two percent of the original amount each year.
Note: there are additional local city/county taxes (Mello Roos for example) that are often added to property taxes, but for simplicity we will not delve into those for this story.
Homeowners that have owned their properties for a long time have a tax rate base significantly lower than more recent homeowners. However, if someone was to move they would jump into a current rate base regardless of the next homes value or sold homes value.
Enter Proposition 60.
In 1986 California voters passed Proposition 60 which allows seniors to transfer their property tax rate base to another property. There are some caveats: 1. You must transfer to another home within the same county 2. Homeowner (or at least one spouse) must be 55 years of age or older (hardly senior these days) 3. The new property must be of equal and lesser value of the sold home (based on sold price) 4. You must buy the new property within two years of selling the first property 5. The transfer can only happen one time (applies to co-owners and to spouses).
Proposition 90, passed in 1988, extends the possibilities of Prop 60 by allowing for inter-county transfers within certain other counties in California (not all counties participate). The current Prop 90 counties are: Alameda, El Dorado, Orange County, Riverside, San Bernardino, San Diego, San Mateo, Santa Clara, Ventura.
Here is a hypothetical family scenario that can help explain how homeowners can apply the benefits of Proposition 60/90:
Stickley "Home" Example
In 1988 Sally and John Stickley purchased a quaint little bungalow for $190,000 establishing a property tax rate base of $1,900. Over the years they have done improvements and the market has climbed up and dipped down only to climb again. By 2018, thirty years after purchase, their property tax bill has risen to $3,900 while the value of their home has risen to $897,750.00. This is a pretty common scenario for Bungalow Heaven.
If they were to buy their same home today, their property taxes would be almost $9,000 a year.
Now in their late 60's, Sally and John are now empty nesters. Their only son, Gustav, is all grown up and has started his own family. With more home then they need, the Stickley's are considering buying a condo and moving to Palm Springs for the health benefits that it’s climate brings.
The condo they are considering can be purchased for $600,000. John and Sally love the ability to bank almost $300,000 in profits from selling their current home but are concerned about property taxes. The difference on a new condo would be over $2,000 more a year which could equate to a large chunk of the retirement over the next few years.
However, thanks to Proposition 60, the Stickley’s can transfer their low tax base to their new condo and save them roughly $31,000 over the next fifteen years.
Those that qualify for the benefits of Prop 60/90 can rest in the fact that the low tax rate base that they have earned can stay with them in a move.
HAVE A PROPERTY TAX QUESTION?
Tax Law Changes:
With tax reform in the rear-view mirror, there are several changes homeowners will face when it comes to file their 2018 taxes. None of these apply to the 2017 taxes that you will file now.
1. Mortgage Interest Deduction. Homes purchased after Dec 15th 2017 may deduct the interest paid on a mortgage up to $750,000 (was $1 million prior).
2. Property Tax Deduction is capped at $10,000 now.
3. Home equity deduction. The deduction for home equity loans eliminated.
4. Second Homes Interest Deduction: Reduced to interest up to $750,000 like primary homes.
5. Moving Expenses Deduction: Eliminated for all except for active military.
Capital Gains: After selling a property, you have a gain of profits over what you purchased the property for, if you have owned your home for some time, this could be substantial. The taxes on it would be also. Capital Gain tax law allows you to exclude up to $500,000 of capital gain income. No changes to this for 2018.
While there are still some lingering questions about itemized deductions for 2018 taxes, 2017 itemizing is still very much a viable game plan for taxes. Those that itemize are always on the lookout for deductions that may have missed and there are a lot of possibilities to ponder. For example, did you know certain dog breeds can be written off as guard dogs if you work from home? Or that the interest on student loan debt that you pay for your kids can be claimed. Another lesser known write-off are Medicare premiums for self-employed. There are a lot and a great tax accountant will help you get the most without getting in trouble.
Certain dog breeds can be written off as guard dogs.
Deductions can go really right or really wrong, you should without a doubt consult a tax professional to discuss all of your potential write offs. One often suggested piece of advice is to do the research on common deductions, note which you believe apply to you and ask about them specifically with your tax planner/accountant. Kiplinger’s put out an interesting collection of overlooked write offs just before tax time last year. Find it here: LINK
Disclaimer: There are many nuances to taxes and your specific situation will affect the bottom line and therefore, I recommend you speak with your account or tax professional about your specific situation.
If you have any questions regarding property taxes or need a recommendation on a good tax professional just send an email. The boutique nature of Podley Properties is such that we are designed to be a local resource for those living in the San Gabriel Valley and over the forty years that Bill Podley has been building the brokerage, we have amasses many solid contacts.
The new tax rule has lots of levels and being new, it will take some time for the experts to know all the ins and outs. Will investing in property remain as attractive? Time will tell. We do know that the Federal Reserve will raise rates this year as many as three or four more time and that Moody's Analytics predicts housing prices to drop nearly 4% in the summer of 2019 as a result of these new rules. Knowing this, if you have been considering selling, now is the time to take the equity and run.
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Michael Robleto is a REALTOR® with Compass. His analytical and open approach to sales has served his clients well in his twenty years of sales. Michael brings a modern data and technology-driven approach to real estate while focusing on the historic architecture of Bungalow Heaven. Tapping his experience in media and journalism, he publishes in-depth blog articles that will be of interest to homeowners and home-buyers. He can be found on Facebook, YouTube, Twitter and Instagram under the common profile name of his blog BungalowAgent or at www.BunaglowAgent.com/blog. For Sellers or Buyers Agent representation he can be contacted directly.