I’ve been getting a lot of questions lately about one particular topic: real estate taxes. While I can’t legally offer any tax advice, I can explain the basic framework of how taxes operate in real estate transactions.
There are two main taxes you need to know: capital gains taxes and property taxes. A capital gains tax is when you sell a property for a profit. Property taxes are based on your value and what you paid for your house. If you’ve lived in a house two out of the last five years, the IRS considers that your primary residence.
How do capital gains taxes affect you? If you’re a single person and have a gain of up to $250,000, that $250,000 on your primary residence will be tax-free. If you’re married, you get up to $500,000 of gain on that residence and that sale.
How about property taxes? A lot of people have lived in their homes a long time in our area, and oftentimes they have a low tax base. For example, let’s say they paid $200,000 for their house and their taxes are roughly $2,000 a year. Let’s suppose further that they sell that house for $600,000 and they want to buy their next house for $700,000. When they buy that house for $700,000, that’s going to be taxed based on the value of $700,000 and at about 1% per year. That means their taxes went from $2,000 to $7,000 per year. We have people who don’t make the move, then, because they don’t want to lose that low tax base.
There are certain vehicles such as Prop 60, though, that allow you to transfer your tax base to another house. If you have a house that you paid $200,000 for and you’re now selling it for $600,000, if you buy a house for equal or lesser value, you can transfer that tax base.
If you have any questions, please feel free to reach out to us at your convenience. We look forward to hearing from you!