3 Key Tax Tips for California Home Sellers

Welcome to another edition of “Know your Numbers” with Realtor and CPA, Mareijke. Today, we're diving into a crucial topic for homeowners: understanding tax implications when selling your home in California and more specifically, the San Francisco Bay area. Whether you're downsizing, an empty nester, or relocating, it's vital to know how to minimize the various taxes involved so you can preserve your hard-earned home equity.

Proposition 19: Keep Your Low Property Tax

Living in San Francisco and dreaming of moving to the SF East Bay? Or contemplating a move after a long time since you first purchased your home? You might be enjoying relatively low property tax based on the value of your current home or county of residence, and concerned about the taxes you will pay on a new property when you move.?

Proposition 19 allows you to sell your home and transfer your low property tax basis anywhere within California. Effective, 2021, Prop 19 offers significant benefits for homeowner(s) over age 55, those severely disabled, or victims of wildfires/natural disasters, but it could be relevant to your situation even if you don’t belong to those groups.?

Key points:

1. You can now take your low property tax base to any county in California.
2. If your new property has a higher market value, only the incremental value is reassessed at current rates. See the illustration below.
3. Forms must be completed with your new county within six months of moving to your new home.
4. Remember you are responsible for property tax on your home up to the date of sale.

To illustrate point 2 above: Imagine you sell your home for $850,000, and?you had been paying an annual property tax bill of $4,000. Now you purchase your new home in California for $1,000,000. Only the incremental $150,000, ($1,000,000 minus $850,000) would be re-assessed at current rates, which would be a tax of around $1875. You get to keep your $4,000 property tax bill plus the approximately $1,875, for a total property tax bill of only $5,875. In contrast, without Prop 19, your property tax on the new home would be much higher -- closer to? $12,500.

Transfer Tax at Sale

These numbers can add up to several thousands of dollars. While home sellers pay a county transfer tax of around 0.11% of the sale price, be aware that in some cities, there is also a higher city transfer tax that is typically split 50/50 split between sellers and buyers. Consult with us if you want to know the transfer tax numbers for your home.?

Capital Gains Tax

First, let’s address one of the biggest misconceptions I see among our home seller clients: The idea that selling your primary home and buying another within 6 months allows you to take the entire profit tax-free. This is incorrect.?

There is no deferral of capital gains tax for primary residences based on purchasing a new home quickly. This concept only applies to rental/income properties, not your primary residence. However, under certain conditions the IRS allows a significant portion of profits from selling a primary home to be tax-free. This is where it can get complicated. For those interested in tax-efficient investment structures that require a longer-term commitment to avoid paying gains tax at sale, we can provide referrals to specialists in this area.

What are the Capital Gains Exemptions?

• Married couples filing jointly: Profit up to $500,000 in profit is tax-free.
• Single filers or married filing separately: Up to $250,000 in profit is tax-free.
• Profit above these amounts are taxed at 10%, 15%, or 20%, depending on your overall taxable income levels

Those are the big things to know: I’ll be writing an in-depth blog on this topic in the near future to dive deeper into the story of capital gains tax.?

Bringing It All Together

Becoming aware of all the relevant tax issues for your sale – Proposition 19, transfer tax at sale and capital gains exemptions – means that you can learn how to reduce your tax burden when selling your home. This leaves more money in your pocket for your next home purchase or retirement (and makes it easier to buy a new house before selling your current one -- it can be done!)

Remember, every situation is unique. Knowing about these strategies can provide a solid foundation and empower you to understand your options. It's crucial to consult with professionals – a realtor, CPA, and estate planning attorney – to tailor a plan that maximizes your benefits while ensuring compliance with all applicable laws.

(Did I mention that I’m both a realtor and CPA?)

If you're seriously considering selling your home and want to minimize the headache of navigating the tax considerations outlined here, let’s connect.