Why the supply of California homes for sale will likely remain difficult:
Proposition 13 - was passed by nearly two-thirds of California’s voters on June 6th, 1978. Property tax rates could not now exceed 1 percent of the property’s market value and valuations couldn’t grow by more than 2% per annum unless the property was sold. Once sold the property is reassessed at 1% of the new market value (with the 2% yearly cap placed on this new assessment).
Taxpayer Relief Act of 1997 – provided up to $250,000 profit tax free when you selling a primary residence, if you’re a single owner (twice that if you’re married). The home must have been your principal residence 2 out of the past 5 years.
So with these two “tax breaks” why does inventory in California remain so low? Here is an example of a recent sale - a charming 1913 craftsman 2,048 sq ft home on Pine Street, Mission Hills, San Diego 92103.
The home sold in April of this year for $1,095,000 – it was only on the market for 4 days. The same house sold for $390,000 in 1995 - here’s a quick profit calculation on the sale:
Resale $1,095,000
Less purchase $ 390,000
Profit $ 705,000
So, in this example a married couple will owe capital gains tax on $205,000 (less the cost of selling – escrow, title and real estate fees).
The sellers 2004 annual Property Taxes for Pine Street were $5,042. If the sellers moved up market and bought a new home at say $1,500,000 their annual property taxes would jump to approx $18,750 (with bits added San Diego property taxes are now approx 1.25% of the new sales price) – that’s an increase of over $13,000. Even if it’s tax deductible that’s a big hike!
Many of these owners who bought more than 3 or 5 years ago are doing these calculations and deciding to stay put rather than face the cost of moving. Perhaps it will only be the trifecta of death, divorce or bankruptcy that will bring some of these homes to market.
Note: There is a transfer of tax base available for tax payers over 55 but you can only use it once.
Here are annual California Median Sales Prices with yearly price appreciation:
Source: California Association of REALTORS®
All assumptions should be verified by an appropriate legal or tax professional.
