Plans to transfer your property tax

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Hopefully by now you’re aware of the historic effort C.A.R. is spearheading to qualify a ballot initiative for the November 2018 ballot. Known as the Property Tax Fairness Initiative, this measure would allow homeowners 55 years of age or older to transfer their Prop. 13 tax base to a home of any price, anywhere in the state, any number of times, These protections also would be extended to people who are disabled and those who have lost their homes to a natural disaster. It’s a carefully written initiative that includes appropriate safeguards while eliminating California’s property tax “moving penalty.”

In order to qualify the initiative for the ballot, C.A.R. must collect approximately one million signatures from California registered voters. Petitions were mailed to each C.A.R. member in early January, urging them to sign the petition and to obtain four additional signatures of registered voters within the same county, and mail it back to C.A.R.

People are responding enthusiastically to the measure, but C.A.R. also has received a fair number of questions regarding this initiative and how it works, especially in relation to Props. 13, 60, and 90.

We hope this short Q&A will help answer those questions.

Why is the Property Tax Fairness Initiative Needed?
It’s no secret that California is in the midst of a housing crisis. Not only is affordability near an all-time low, but housing inventory remains stubbornly low – wreaking havoc on the market and reducing homeownership opportunities for many would-be buyers in California.

On top of these challenges, nearly three-quarters of homeowners 55 years of age or older have not moved since 2000, furthering constricting inventory. Research has indicated that one of the primary reasons these homeowners are effectively “locked” into their homes is the prospect of paying higher property taxes.

C.A.R.’s Property Tax Fairness Initiative will help these homeowners sell their current homes and move without being subjected to what is effectively a massive “moving penalty.” These homes will then be available for families and other would-be buyers to purchase.

How Do Property Tax Assessments Currently Work?
The amount a homeowner pays in property taxes is based on the assessed value of the home at the time of purchase. Generally, Prop. 13 limits property taxes to 1 percent of the assessed value at the time of purchase, even if the value of the property subsequently increases.

What is Prop. 13?
Prop. 13 is a California proposition that limits the property tax rate to 1 percent for all California property and annual tax increases to no more than 2 percent. This protects homeowners from losing their homes due to unforeseen property tax increases.

There also are two other propositions that affect property taxes – Prop. 60 and Prop. 90.

What is Prop. 60?
Prop. 60 allows senior homeowners, 55 years of age or older, to transfer their property tax baseone time -- to another home in the same county, as long as the purchase price of the replacement home is equal to, or less than, the sale price of the original residence.

What is Prop. 90?
Prop. 90 is an extension of the original Prop. 60 program. Prop. 90 allows senior homeowners to transfer their property tax base, one time, to a home in a different county, as long as the county accepts such transfers.

 Prop. 60Prop. 90C.A.R. Property Tax
Fairness Initiative

Transfer Tax BaseOne timeOne timeUnlimited

Counties AllowedSame countyDifferent county
(if new county
accepts transfer)Anywhere in the state

PriceReplacement home equal to,or less than, the price of the property soldReplacement home equal to,or less than, the price of the property soldAny price


For more information about C.A.R.’s Property Tax Fairness Initiative, visit on.car.org/portability2018 or send us an email at portability@car.org.


 

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phone (213) 739-8200; fax (213) 480-7724

LEGISLATIVE OFFICES:
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How real estate investors can cash in under new tax law

The new federal tax law took away some benefits of homeownership but gave real estate investors a gift they might not be aware of yet.

Owners of investment property — from mom and pop landlords to big-time real estate moguls — could get a federal tax deduction of up to 20 percent of their net rental income for tax years 2018 through 2025. Most people who own shares in real estate investment trusts can also deduct up to 20 percent of their ordinary REIT dividends.

This tax break has been overshadowed by all the wailing over the law’s treatment of homeowners. It will reduce the mortgage interest and property tax deductions for some homeowners, but these new limits do not apply to interest and property taxes on income property.

More importantly, real estate investors get a potentially large tax break they didn’t have before.

It comes under the section of HR1 titled “Deduction for qualified business income of pass-thru entities.” Congress “used the Facebook spelling” of “through,” quipped Paul Bleeg, a partner with accounting firm EisnerAmper.

Bleeg said the new deduction could increase investor demand for real estate, offsetting any potential drop in demand from homeowners.

The pass-through provision is insanely complex, but it essentially lets owners of pass-through entities deduct up to 20 percent of their business income on their personal tax return, subject to certain limits.

Pass-through entities pay no business tax. Instead, their income passes through to their owners and is taxed at their personal tax rates. They include sole proprietorships, partnerships, limited liability companies and S corporations.

In the past, 100 percent of this income was taxed at the owner’s ordinary income tax rate. In the future, some owners can deduct up to 20 percent of it on their federal return (but not their California return unless the state conforms to this provision). Taxpayers won’t have to itemize to claim the new deduction, which will show up on a new line after adjusted gross income, said Mark Luscombe, principal tax and accounting analyst with Wolters Kluwer.

Congress put several limits on the new deduction, which differ depending on the type of business and the owner’s taxable income.

The first limit applies to everyone claiming the 20 percent pass-through deduction. It says your deduction generally cannot be more than 20 percent of your taxable income, excluding capital gains and the pass-through deduction itself. (Taxable income is your household income from all sources minus your deductions.)

If your taxable income is less than $157,500 (single) or $315,000 (married filing jointly), that is the only limit that applies. If your taxable income is above those amounts, then other limits apply, depending on the type of business.

If you are in a “specified service trade or business,” your deduction will be phased out between $157,500 and $207,500 in income (single) or between $315,000 and $415,000 (married filing jointly) according to a fairly simple formula. If your income exceeds the top of the phaseout range, you get no deduction.

Specified service professions include health, law, accounting, actuarial science, performing arts, consulting, athletics, financial and brokerage services or any business where the principal asset “is the reputation or skill” of one or more employees. (Curiously, architects and engineers were excluded from the list.)

This income limit would apply to real estate agents but would not apply to real estate investors because their principal asset is their property, not their skill, said Kenneth Weissenberg, chair of real estate services at EisnerAmper.

If you are not a service professional and your taxable income exceeds $157,500/$315,000, then your pass-through deduction may be limited by a convoluted computation. It says: Your pass-through deduction can’t exceed the greater of either 50 percent of W-2 wages or 25 percent of W-2 wages plus 2.5 percent of the “unadjusted basis” of depreciable assets, which generally means what the owner paid for the assets, excluding land. Real estate investors would be subject to this nutty math if their income exceeds the limit.

To get the deduction, real estate investors must have net income from a property. Many real estate investors have net losses thanks to depreciation, interest, repairs and other expenses.

Suppose Donna is single, earns $100,000 a year working for a tech company, and owns a duplex that generates $20,000 a year in net income. Her taxable income, we’ll assume, is $108,000.

Under the new law, her pass-through deduction would be 20 percent of $20,000 or $4,000. It is not reduced because $4,000 is less than than 20 percent of her taxable income.

Now suppose she makes $200,000 at her tech job and her taxable income including the rental is $208,000. In this case she would have to do the complex computation.

We’ll assume she bought the duplex for $600,000 but $100,000 of that was land value. Her unadjusted basis is $500,000, and 2.5 percent of that is $12,500. She doesn’t pay anyone a salary, so her W-2 wages are zero. Her deduction still is not reduced because $4,000 is less than $12,500.

“The wages and depreciable property limits won’t impact most real investors,” said Stephen L. Nelson, a CPA in Redmond, Wash., who wrote a monograph on the new deduction.

One gray area is whether people who own real estate in their own names and file their rental income on Schedule E would qualify for the pass-through deduction.

“It’s not 100 percent clear,” said Jeff Levine, director of financial planning with Blueprint Wealth Alliance. To get the percent deduction, “it has to be a qualified trade or business.” The new law does not clearly define trade or business, and the term is defined differently in different parts of the tax code. “Depending on IRS interpretation, a taxpayer’s involvement in the rental property could be a factor” in whether he or she qualifies.

Luscombe said he believes Congress intended real estate investors who use Schedule E to qualify for the deduction, and a congressional committee report supports that idea.

Weissenberg said they clearly would qualify for the deduction.

Nelson also said they should qualify, “but we’ll have to see what the IRS says” when it issues regulations.

Real estate investors do not need to form a limited liability company to take this deduction, Nelson added. They can put property into an LLC (many do for liability reasons) as long as it’s not taxed as a corporation.

The law does state that people who own shares in a real estate investment trust can deduct 20 percent of their ordinary dividends (but not capital gains dividends) starting in 2018. This deduction cannot exceed 20 percent of their taxable income, but other limits do not apply.

“Real estate is a big-time winner” in the tax law, Weissenberg said, thanks to this and other provisions.

- Written by Kathleen Pender of the San Francisco Chronicle

An APPEAL FOR SANTA ROSA VICTIMS

Dear Gordon,

 

My daughter, age 25, lived in the Estancia Apartments on Old Redwood Highway in Santa Rosa. She lost her apartment and all her belongings early on October 9. At 1:30 in the morning the power went out and shortly after that there were sirens on the frontage road and emergency vehicles with bullhorns yelling for everyone to evacuate. She had only a few minutes to locate her purse, shoes, and dog before leaving. She had to return to the apartment to get her keys. She left everything behind. She forgot to lock the door. She was one of the first people to leave the complex. There was no direction of where to go, the first responders just said to leave. She called her friend who said to go south so that's what she did. She tried to get to the freeway, highway 101 and there was a traffic jam. She finally made it to the freeway. There was fire on both sides of the road and embers blowing across the road. She could barely see because of all the smoke. She almost turned around because ahead of her cars were turning around and driving back the other direction in the carpool lane. Her friend told her to keep driving south, that there was no fire, so keep driving south. Luckily that's what she did. It took about an hour for her to drive about 5 miles but she was out of danger. At about 8am she drove to Livermore. The next day we learned her apartment burned to the ground along with all her belongings. The weekend before (October 8) she was home and cleaned out her bedroom of everything that was important to her and took it to Santa Rosa. Everything was lost in the fire. All her childhood memories, all her Christmas ornaments and decorations she has collected over the years, her souveniers from vacations and a trip to Europe right after high school, all gone. She took my grandmother's china and some of that survived but most was broken. We are lucky and count our blessings every day that we have our daughter, happy and healthy and thriving. She went back to Santa Rosa one week ago and is temporarily living in a mini apartment until something becomes available. (The best gift for victims at this point is gift cards). There is no place to store 'stuff' until more permanent housing becomes available. Everyone has been so kind and compassionate through this ordeal.

My daughter is very resilient. She is a CPA so I have purchased her a new work wardrobe, casual wardrobe, stuff for her dog, coats, basics, kitchen necessities, etc. probably spent several thousand dollars. I would do it again in a heartbeat. You cannot put a price tag on your child's life. It is priceless. She left with her dog and car and that is all. We are so lucky and blessed. Thank you for putting the word out that the victims need help. Unfortunately since my daughter has a decent job she does not qualify for any help from FEMA, United Way or any other government organization. Friends and family have been a godsend.

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Santa Rosa

disaster...

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Thank you for reading my story.

 

Beth E

Livermore CA

Beth

 

Thanks, this is a tragic story and all to common I'm afraid. For thousands this will not be a happy festive season. Can you help please. Please email gordon@thescotsman.com subject donations, and I will pick up. We thank you in advance.

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New Tax Reform could damage our property values!

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Here's why..

The current tax reform planwould weaken the tax incentives for owning a home, such as the mortgage interest deduction. Also it tax will increase taxes on middle-class homeowners through the elimination of the state and local tax deduction.

The tax reform framework recently released by congressional leaders and the White House promises to lower taxes for the middle class and to create economic growth. However, by repealing the deduction for state and local taxes, as well as most other deductions, while raising the standard deduction, it would eliminate the time-honored tax incentives of owning a home for 95 percent of current and prospective homeowners. It could also lower the value of all homes by more than 10 percent and damage growth. 

Further, because this kind of tax reform would repeal personal and dependency exemptions, millions of middle-income home-owning families could end up paying more tax. 

Homeowners already pay 83 percent of all federal income taxes, and this should not go higher in order to fund a tax cut for corporations. Tax reform is important, but should first, do no harm. 

We do need to reform the tax code AND protect middle class homeowners but not turn America from a home-owning nation to a home-renting nation!