The Selling Process
Recent Sales
Prep Your Home
Tax Tips
 

There are a variety of taxes that affect real estate.  If you own property in California you will have property taxes due twice a year.  Selling a home triggers a significant tax event.  If you are selling your own home and you've lived in it over a year then you will most likely face a capital gains tax.  With investment property you also face property taxes and capital gains taxes.

Here are some insights into various tax strategies for California real estate.  Consult a tax expert if you have any questions.

Property Taxes

In California property taxes are due twice a year, December 10 and April 10.  The tax is calculated on an annual basis and is initially set at the time you buy your property using 1% of the sales price as a base with a few adjustments.  The adjustments include a reduction for owner occupied property plus several assessments for local parcel taxes.  In Marin county a good estimate for property taxes on a new property is 1.2% but in reality can vary from around 1.1% to 1.4% depending on the specific area.  Each year your tax basis can be increased a maximum of 2%.

There is no way to avoid this tax, but you may want to consider making your April payment in late December to get the additional deduction on your current year tax return.

Property Taxes - Propositions 60, 90, 110

If you are over 55 (or permanently disabled) you can, under certain conditions, transfer your current low property taxes to a new residence.

Propositions 60, 90 and 110 are constitutional amendments that provide for the transfer of a property's base year tax value from an existing residence to a replacement residence as long as certain conditions are met.
The conditions include the following:

• You must be at least 55 years old or severely and permanently disabled.
• Both properties must be in the same county, unless you live in a county with an ordinance that allows intercounty transfers (Alameda, Los Angeles,  Orange, Santa Clara, San Diego, San Mateo or Ventura).
• Generally, the replacement property must be of equal or lesser value than the original property.
• The replacement property must be acquired or constructed within two years of the sale of the original property and the owner must file an application within three years.
• The original property must be subject to reappraisal, in other words, transfers between parents do not apply in most cases.
  
  For more details go to www.boe.ca.gov/proptaxes/faqs/reappraisal.htm

Capital Gains - $250,000/$500,000 Exclusion

When you sell your primary residence and realize a gain on the sale, you owe capital gains tax if you've lived in the property for over a year.  There is, however, an exclusion on the first $250,000 if single, and $500,000 if married, in gains if you have used the property as your primary residence for two of the last five years.  Anything above those exclusions is taxed at the current capital gains rate of 15%. 

Defer Gains - 1031 Exchange

Section 1031 of the Internal Revenue Code states that "No gain...shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged soley for property of like kind...". In other words, IRC 1031 allows the deferment of capital gains tax when exchanging investment property. In order to take advantage of a 1031 exchange a property owner must meet these key requirements:

• There must be at least two properties in an exchange. One or more you are selling and one or more replacement properties.
• The properties must be commercial or investment properties, you cannot exchange personal property (residential or vacation homes). The properties to be exchanged do not have to be identical (e.g. land may be exchanged for apartments).
• The purchase price of the replacement property must be equal to, or greater than, the sales price of the sold property. All sales proceeds must be reinvested in the replacement property.
• You must use a middleman, the IRS will not allow you to receive cash proceeds. A totally independent accommodator must be used to implement the exchange.
• Prior to the close on the sold property you must declare intent to perform an exchange through a written agreeement with an accomodator. Within 45 days after close you must identify the potential replacement property and within 180 days after close you must acquire the replacement property.

Defer Gains - Installment Sales

In an installment sale the owner of a property sells it on a long-term payment plan. In this scenario, the buyer pays a down payment plus regular installments (with interest) over some period of time - say five years. The tax burden is due upon receipt of each installment and is therefore spread over the five year period. The key elements of a successful installment sale include verifying the creditworthiness of the buyer, ensuring the interest rate charged is competitive with market rates, and obtaining a significant down payment (20% or more) in case of default by the buyer.

Defer Gains - Private Annuity Sales

A private annuity sale is similar to an installment sale. In a private annuity trust the property owner transfers the property to a trust prior to the close. The trust then pays the owner not with cash but with a private annuity that pays the owner in installments over the life of the owner. The trust then sells the property to the buyer getting the cash. Again, tax is due only upon receipt of the payments. The key difference between the private annuity sale and the installment sale is that the private annuity contract can stipulate that payments from the trust be postponed whereas payments on an installment sale must begin immediately. 

If you are in the market for a new home contact Jim King at 415-360-9191 or jim.king@pacunion.com or click here.

Related Links

Pacific Union International
CleanOffer