Since the pandemic, real estate prices have increase by 50-100% for some properties. If you are in this position and your home no longer works for you, you’re confronted with a decision is you’re over the age of 55. Do you take the capital gains tax hit in order to maintain a lower property tax base or do you sacrifice a lower property tax base in order to defer your capital gains.

Exercising Prop 19 and taking the capital gains

First and foremost, consult your tax specialist. With prices jumped so quickly, there are some tax and financial considerations you may want to think about. First, let’s go over capital gains. The state of California affords you an allowance of $250,000 if you’re single and $500,000 if you’re married. That means that if you are married and your property has increased in value by more than $500,000, your capital gains ought to effect anything above your original purchase price plus $500,000. For example, if you purchased a home for $700,000, but you were to sell your home for $1,500,000, you ought to experience the capital gains tax total of $300,000. That is $700,000 (your original purchase prices) plus the $500,000 for a total of $1,200,000. This equates to a net difference of $300,000. Again, this is assuming you’re married. If you’re not married and experience similar gains, your capital gains total would be $550,000.
However, if you choose this route, hopefully you would be able to transfer your property taxes via exercising Proposition 19. Let’s use the same scenario and assume that you’re paying $9000/year in property taxes as a result of your purchase. If you were to purchase a new home for $2,000,000, your property tax math would look as follows:

$2,000,000-$1,500,000= $500,000

$500,000 (property tax rate of .0121)= $6050

$6050+(original property tax payment) $9000= $15,050

Although $15,050 is more than the original $9000/year, it’s still less than the $24,000 that would have been the tax rate if you had not exercised Proposition 19.

This means that scenario one equates to a capital gains tax on $300,000 assuming you’re married and but saving almost $10,000/year in property taxes. So what does scenario two look like?

Deferring your capital gains

Scenario two consists of deferring your capital gains, but taking on the higher property tax base. It starts with converting your property to a rental. This means that you would need to move out of your home and renting your home for two years. At this point, you can sell your home. However, within 45 days of selling your home, you are obligated to identify 3 other properties that you might purchase. For more specifics, contact an accommodator. Another time frame that is relevant is how quickly you can close on the next home. From the sale of your first property, you have 180 days to close on the next. Even after you close, you still cannot occupy the property for another 2 years. However, you should be able to move in after that time frame. Again, consult your tax professional for specifics. Deferring your capital gains tax might be worth it. Assuming the same scenario, the financials equate to the following: no capital gains tax, but new property taxes of $24,000/year.

In most cases, it probably makes sense to transfer your property tax base. However, if you can’t exercise Proposition 19, maybe deferring your capital gains tax would be best.