Real Estate and Tax Law 101

Recently, several of my clients have asked for a quick rundown of various real estate and tax-related laws.  Here are some of the key laws any current or future home-owner should be aware of.  Note: the laws are complex.  This is intended to provide a starting point only.  Consult with your own attorney or tax advisor, or contact me for a referral.

1.  Home Mortgage Interest Deduction. 

You can deduct home mortgage interest on the first $750,000 ($375,000 if married filing separately) of indebtedness. However, higher limitations ($1 million ($500,000 if married filing separately)) apply if you are deducting mortgage interest from indebtedness incurred before December 16, 2017.  See IRS Pub 936.

2.  Excluding Tax on Capital Gain from the Sale of Your Home. 

If you have a capital gain from the sale of your home, you may be able to exclude up to $500,000 of that gain from your income if you are married and filing jointly (or $250,000 if an individual), provided that you have owned and lived in the home as your principal residence for an aggregate of at least two out of the five years before the sale.  There’s no limit on the number of times you can use this exclusion, provided that you meet the 2 year ownership and use minimums.

“Capital gain” is the home’s selling price minus deductible selling costs and minus your “tax basis” in the property.  Your “tax basis” is what you paid for the property plus some of the costs of acquiring it, plus major improvement costs you’ve incurred during your ownership, so it’s worth keeping track of them.  The best explanation I’ve found for this tax deduction is at Nolo Press’s excellent website, here. You can also take a look at the IRS’s info pamphlet here.

3. One-Time Right to Transfer your Property Tax Assessment:  Props 60 and 90.

Empty-nesters and other long-time home-owners often think about selling their home and “downsizing” so that they can simplify their lives, live closer to family, or untap the home’s increase in value for other purposes (see “Excluding Tax on Capital Gain” above). What can stop them is that they may end up paying far more in annual property tax assessments on the new home, even if it is a more modest home than their current one.  (For an explanation, see my August 2017 newsletter.)

California Proposition 60 gives homeowners 55 or older a one-time right to transfer the property tax assessment on their existing primary residence to a new one purchased for no more than the adjusted sale price of their previous one, provided both homes are located in the same county, and provided it is purchased within two years of the prior residence.

California Proposition 90 allows qualifying homeowners to transfer their property tax assessment to new homes located within eleven counties that have agreed to reciprocal transfer rights.  In the Bay Area, only San Mateo, Alameda, and Santa Clara participate, so San Francisco homeowners looking to move elsewhere are out of luck.  California Proposition 5, which appeared on the ballot in 2018, would have made property taxes transferable anywhere in the state.  It was voted down resoundingly.

4. New State-Wide Rent Control Law (AB 1482).  Effective January 1, 2020, this new law will cap rental increases to 5% plus inflation annually.  The law applies to buildings that are 15 years or older.  Most single-family homes and condominiums are excluded unless they are owned by a corporate-type entity.   

The law does not supersede more restrictive local rent control laws.  So, in San Francisco the local Rent Ordinance will continue to govern.  However, the new law will affect newer apartments with certificates of occupancy dated earlier than 2005; previously, apartments constructed after June 13, 1979 were largely exempt. 

Generally, landlords are free to raise rents to whatever they want after a tenant vacates a unit.

The new ordinance – and especially its interaction with existing San Francisco Rent Control laws – is complicated.  If you are thinking about purchasing rental income property or renting out property you already own, I urge you to consult with a qualified attorney (call or email me for a referral.). In the meantime, you can find more information from a local law firm here.

5.  Community Opportunity to Purchase Act (“COPA”).

“COPA” is a new SF law that requires owners of buildings with three or more residential units to give a right of first offer and a right of first refusal to a designated set of non-profits before they can sell their building to a third party.  I wrote about this new legislation recently.  You can read the details here.

As always, your comments, questions, and referrals are much appreciated!

Misha

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