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0 pointsthebradbain4y ago0 comments

Thanks for the correction -- you're right.

It doesn't really change my point though – I still don't see why a $2M+ property deserves to get transferred tax free. A $2M property would still only pay a little over $10,000/year in property taxes after the $1M exemption (which you can deduct against federal taxes, even with the SALT cap, which itself will likely repealed!). A pretty nice discount for an heir compared to someone who just went through actually buying a $2M home and pays twice the tax.

Honestly, if you're inheriting up to a $5M home for free in CA, and are still reliant on a job to make ends meet, the payment probably comes out to more or less what you would pay in a mortgage+taxes for a ~$1M home. A pretty good deal! If you're inheriting anything more than a $5M home, then I don't really think Prop 13 was intended for you in the first place – people with $10, $50, $100 million+ properties, well, it's my belief that we shouldn't be basing our entire housing policy on what's best for them. They can likely afford the taxes.

Not to mention that you can only shield a house from re-assessment for 1 generation, so even if there was a multi-million dollar family home that this family simply couldn't afford to pay taxes on otherwise, the heir of the heir would have to pay taxes regardless. So what's so privileged about the situation that tax reassessment gets to skip a generation? The law as is is designed to benefit a shrinking sliver of the CA population while debatably actively hurting the rest.

I think a decent compromise that won't actively pull the rug out from anyone while also leveling the playing field is just ending Prop 13-related inheritance exemptions altogether. It wasn't even part of the original law. Then get rid of the exemption for all commercial and secondary/investment properties going forward. Let people live in their primary homes with a frozen tax basis, sure, just don't let them transfer it (and for the edge case, to encourage downsizing after becoming "empty nesters", allow people to transfer their assessed tax basis to a property of lesser or equal market value).

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kelnos4y ago

> the SALT cap, which itself will likely repealed!

What's your basis for this belief? My understanding around Biden's tax plans was that the SALT deduction cap would likely remain at $10k.

Just did a quick search for recent news, and nearly all of what I'm reading is doom-and-gloom around the possibility that the SALT deduction cap will be repealed. Which makes sense, since that would lower tax revenue, and that's not something politically palatable with the Dems trying to push through multi-trillion dollar infrastructure spending.

thebradbainOP4y ago

Well, it appears you may be right, there. As of last month, I read the consensus was Democrats wanted SALT repealed. It looks like that won’t be the case now, as the spending plan gets whittled down — now it’s looking more like a raised limit, at most.

Previously: https://www.google.com/amp/s/www.cnbc.com/amp/2021/09/08/mod...

bdowling4y ago

Prop 19's targeting inheritance exemptions will have uneven effects. The very wealthy won't be affected at all because, on the advice of their estate planners, they will have transferred their properties into corporate entities long ago. (Recall that properties owned by corporations aren't reassessed when stock ownership changes and Prop 19 didn't change that.) Heirs to properties worth less than $1m who intend to use the property as a primary residence are also unaffected.

There is, however, a large group of ordinary middle-class people, particularly in cities like Los Angeles or San Francisco, who own what were once modest homes that are now worth more than $1m.[0] Their heirs will be burdened when the property tax bills double (or more) in one year, even if the heirs use the property as their primary residence. More heirs will sell inherited properties, which is exactly what the real estate brokers who promoted Prop 19 intended. $1m+ is also a sweet spot for broker profitability.

The intent of Prop 13 was to stabilize property taxes after the double-digit hyperinflation of the 1970s by capping annual increases in assessed value at 2%. That created stability for individuals and businesses that led to massive investment in and migration to California.

Prop 19 undoes that stability, but only for a narrow group of people: heirs to $1m+ properties from parents who did not have sophisticated estate planners. From Wikipedia:

    The Case–Shiller housing index shows prices in Los Angeles, San Diego, and San Francisco appreciated 170% from 1987 (the start of available data) to 2012 while the 2% cap only allowed a 67% increase in taxes on homes that were not sold during this 26-year period.

[1][2]. On average, heirs to $1m+ homes in those markets will be hit with roughly a 103% increase in one year (170%-67%). So, Prop 19 hits a narrow group of people with a 100%+ tax increase when Prop 13 was supposed to limit increases to 2%. A compromise rule could have been to spread out the increase over the course of a few years, but that wouldn't induce more sales like the brokers' lobbying group wanted.

Personally, I think it would be fair to increase the annual cap from 2% to 4%. In a decade or so, that would undo much of the tax discrepancies caused by Prop 13. And the effects would be spread out, so people could plan for it. Increasing the cap, however, would never pass because it is clearly a tax increase on everyone and doesn't benefit a special interest like real estate brokers.

[0] The median home price in Los Angeles is now over $900k. https://www.zillow.com/los-angeles-ca/home-values/

[1] https://en.wikipedia.org/wiki/1978_California_Proposition_13...

[2] https://web.archive.org/web/20191011004252/https://us.spindi...

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