One side effect of soaring home prices: Real estate taxes are soaring too.
The government provides many incentives to homeownership, including the mortgage-interest deduction and capital gains exclusion. But the interest deduction is generally limited to interest on $1.1 million in mortgage debt. And the capital gains exclusion is limited to the first $250,000 in profit ($500,000 if married) from the sale of a primary residence. With median home prices pushing or hitting $1 million in parts of the Bay Area, the value of those incentives is starting to erode for some. At the same time, governments impose a variety of real estate taxes that are based on a home’s sale price or value. As prices go up, so do those taxes. Before buying or selling a home, it’s good to know how taxes will affect your costs and – in the case of transfer tax – who will pay it. Here’s a closer look at three types of real estate taxes.
A one-time transfer tax is imposed is imposed when property changes ownership in California, and it varies widely depending on location. The base rate is $1.10 per $1,000 in value, or $1,100 on a $1 million home. About 26 cities, including 16 in the Bay Area, charge an additional tax, according to data from Michael Coleman of CaliforniaCityFinance.com ( http://bit.ly/1vbTxnB).
Oakland and Berkeley levy an additional tax that brings their total rate to $16.10 per $1,000 in sales price, or $16,100 on a $1 million home. The cities of Alameda, Albany and Piedmont also have rates that top $12 per $1,000. San Francisco has a sliding scale. For homes that sell for more than $250,000 but less than $1 million, the rate is $6.80 per $1,000 of sales price. For homes that sell for $1 million to less than $5 million, the rate is $7.50 per $1,000 in sales price. So the tax on a $1 million home would be $7,500. San Francisco’s rate tops out at $25 per $1,000 on homes that sell for more than $10 million.
Most cities that added transfer taxes did so before a 1996 law required local governments to get voter approval for new or higher property taxes, Coleman says. Who pays the transfer tax is negotiable, but in most counties, the seller pays. In cities with additional taxes, it is often split between buyer and seller. In San Francisco, the seller typically pays. In certain transactions that are not typical purchase-sale transactions – such as when a home is transferred into a revocable or living trust – the transfer tax may not apply, saysLarry Tannenbaum, a partner with DLA Piper. If someone gives another person a home, the tax might or might not apply depending on the city and county.
When a home is sold in California, it is reassessed for property tax purposes. The new assessment is typically the sales price. From that point on, its assessed value can go up by no more than 2 percent per year, plus the value of significant improvements, until it is sold again. The tax rate is applied to the assessed value. The statewide rate is 1 percent, but local taxes generally bring the total rate to 1.1 to 1.2 percent, Tannenbaum says. A person buying a $1 million home would pay $11,000 to $12,000 in property tax the first year.
The good news is, homeowners generally can deduct property taxes on their income tax return, but they generally lose the value of this deduction if they are subject to the alternative minimum tax.
In limited circumstances, property is not reassessed when it changes hands. Propositions 60 and 90 let homeowners 55 or older transfer the assessed value from their primary residence to a new primary residence of equal or lesser value, but only if the replacement house is in the same county or in one of nine counties that accept incoming transfers.
Propositions 58 and 193 exclude certain transfers or real estate between parents and children or dependent grandchildren.
Capital Gains Tax
With home prices soaring, more Bay Area homeowners are finding themselves subject to capital gains tax when they sell.
When homeowners sell their primary residence, they can generally exclude the first $250,000 ($500,000 if married) in profit from tax. Anything over that is taxed as a capital gain. They could be subject to an additional 3.8 percent Medicare tax on part of their profit if they are high income and their profit exceeds the exclusion amount.
To calculate profit, homeowners subtract their cost basis from what they got when they sold their home. Cost basis is what they paid for the home, plus the cost of improvements, minus any untaxed profits rolled over from the sale of a home before mid-1997.