How to Sell and Keep Your Low Property Tax Base
Q. I know there is a way we can transfer our property tax basis from one home to the next. What are the requirements?
A. Yes, there is. Please check with the county you are planning to move to, especially if you are not staying in Los Angeles County, and with your tax advisor. I believe that the essential basics of Proposition 90 and two other related propositions are as follows:
At least one of the owners must be at least 55 years old, or severely and permanently disabled, and the property must be their principal residence.
The transfer must be done within two years either before or after the sale of the old property.
The replacement property must be “equal or lesser” in value. An exception to the “value rule” is if the new home is purchased or built within the second year following the sale of the property, the value can be up to 110%.
This transfer can only be used once. An exception is if the claimant was first granted the property tax relief based on being age 55, and then later became severely and permanently disabled. In that case, a second claim can be requested based on the disability.
Again, please check with your tax advisor. This information is based on our understanding and is not intended as legal or tax advice.
There are approximately 10 counties that also allow you to transfer the property tax base between them. This transfer is not automatic, and we are told that forms must be filed within three years of purchasing the new home. Please call my office if you would like a brochure that describes the procedure from one county in detail, or for a list of cooperating counties.
How to Minimize Capital Gains Taxes When Selling
Q. My wife and I are considering selling our home. We have owned it for over 20 years, and think it would sell for close to $3 million. We paid well under $1 million. I believe we would need to pay capital gains taxes on the profit above $500,000. Can the tax due be deferred by reinvesting the sale proceeds in another home? If so, does it matter how much the new home costs?
A. You should always check with your accountant to be certain about any tax-related question. I believe that you are only half correct in your thought process. Under the new law passed by Congress in 1997, you can exclude up to $500,000, provided that you are a married couple and have lived in the home for two of the past five years as your “principle residence”. In this case, you could probably exclude the first $500,000 from capital gains. But you will still have to pay taxes on capital gains above $500,000. The rates have been reduced to 15%-18%.
Under the law before 1997, you could have deferred all capital gains by transferring all of the funds into a new home, but that no longer is the case. This $500,000 exclusion actually consists of a maximum of $250,000 per each individual owner in the year it is sold. There is no limit on how many times this exclusion can be taken under the current law if the criteria mentioned above is met. Again, please check with your tax advisor on such matters.
Confusion About Tax-deferred Exchanges
Q. We want to sell our place and move into a smaller home, but wish to do that as an exchange so we don’t have large taxes to pay. What are the qualifications to do this correctly? Wouldn’t this save us taxes on our $1-million profit?
A. You cannot use the I.R.S. tax-deferred exchange provisions for the sale of your primary residence. To do that, you would first need to convert your home into income-property. After satisfying the criteria for that, which may require two years of renting it out, then the capital gains taxes may be deferred by purchasing another investment property. Please check with your tax advisor about all of these issues!
We can provide you with information on the procedures of doing what is known as a 1031 tax-deferred exchange if you are interested in that course of action.