Lotsa equity but no cash.

[Nords]

Business Week has an interesting article on house-poor retirees with big property-tax bills.

According to BW, one solution is a reverse mortgage.  I guess that's a good idea.

Another is selling:  "For one 79-year-old woman, the answer was selling a rental property she owned to her children. Financial adviser Nancy Flint-Budde of Salem, N.Y., describes this client as a classic case of someone who was house-poor. She was spending 60% to 80% of her income, derived from Social Security and a small pension, on property taxes for the rental property and her own home. Following Flint-Budde's advice, she sold the rental house to her children. Although she had to pay taxes on the capital gains, the retiree generated several hundred thousand dollars for herself -- and the property remained in the family, which was important to her."

This sounds like a case of cutting off one's nose to improve their appearance.  Perhaps she also needed the extra "several hundred thousand dollars" but if she didn't need the money then there might have been other ways to solve the problem.  Was the property-tax burden more expensive than paying taxes on the profits from selling the rental home?

Do we have a tax expert on the board?  Instead of selling it and paying taxes, would it have been better for her kids to pay her property taxes in exchange for her keeping her name on the title and passing it through her estate?  Or would it have been possible for this woman to start deeding a portion of her rental house to her kids each year by gifting the annual amount ($11K & rising)? 

On another rant, it seems to my jaundiced & subjective psyche that many elderly forsake tax avoidance in favor of "just do it" simplifications.  In the 1970s one of our elderly relatives presented his kid with three grocery bags full (!!) of E & EE bonds and insisted that they be changed from the parent's name to the kid's name.  Essentially they wanted the kid to have the bonds, they didn't want to bother with the details of estate planning or taxes, and they didn't want to worry about it any more.  The tax bill for this peace of mind was almost $200K.  The kid admitted later that they should have just put the bags in a safe-deposit box (a big one) and told the parent that the task had been completed.  Peace of mind would have been achieved either way.

I've heard of other families where the older generation will give away a large gift (and file the gift-tax form) rather than do it as a series of annual gifts.  Yeah, it's a lot of paperwork to do a little every year instead of in one big dump.  But how much more would they benefit the next generation by taking the trouble, especially if they have their kids do the paperwork?  I'm intrigued by the idea of incrementally deeding a house to an inheritor by annual gifting, but I've never heard of anyone using the tactic. 

When I'M older I sure hope that I don't lose my youthful zest for tax-avoidance scheming.

 

[Martha]

The story doesn't make sense. It talks about spending 60 to 80 percent of her income from social security and a pension on property taxes for the rental property and her home. Was there no rental income to offset the property taxes? Seems all bass ackwards to me.

I do like the strategy of putting property you want to go to the next generation into an LLC and gifting yearly interests in the LLC to children. Did that for a friend of mine whose father now has given his two sons his cabin without any tax consequence via gifts through a LLC over a number of years.

 

[farmerEd]

I obviously know NONE of the details of this case in particular, but if you live in one of those places where property values (and property taxes) are spiraling out of control, you will see more stories like this.

I KNOW people that have lived in house for 20+ years (modest houses on the water in Massachusetts) who now find themselves in a $2Million property with 20-25-30K annual tax bills...to me that is UNBELIEVABLE to have that much money taken for a piece of property you already own. Its great if you plan on selling, but I am not real big fan of forcing people out of there houses because of out of control property taxes.

My taxes now are $8300, and I find that A LOT of money(and I am working on ways to reduce that using Ag exemptions)...I do have 4 kids in the public shool so in some sense I am getting something for it, but there is no fire department (volunteer), PT police force, no garbage collection, no sewer, no water etc...mostly just the schools and the roads, so thats a lot of money for very little services.

I really wish we had a system like CA where taxes are more or less locked in when you buy....I can see making the decision to sell and leave when the kids have left for college...my taxes will probably 20K or more by then.

 

[LovesLife]

I question the transfer of the EE bonds to the kids name. Retitling the bonds doesn't create a taxable event. Only cashing them in does that.

LL

 

[TromboneAl]

It's my understanding that here in California the assessed value of my house for my property taxes purposes will remain the same unless I remodel. Is that right? Is that because of prop 13? Is it the same in other states?

 

[cute fuzzy bunny]

It depends on your county, I think. Prop 13 sets the value to the purchase price plus a small inflation-ey annual appreciation, which is just a few percent. Some states have that law, others dont. My house in a lot of states would cost me 4-5x the annual property taxes, but they have no income tax or sales tax...some break.

I believe that in most counties in CA, as long as you dont add structures (pool, garage) or add rooms/square footage, your property tax will remain low. Check with your county office as to what triggers a reassessment of property values.

For example, my wifes 13 year old home she paid ~$70k for sold for 240k...annual property taxes on it were a little over $400 a year. Nice!

 

[riskadverse]

It's my understanding that here in California the assessed value of my house for my property taxes purposes will remain the same unless I remodel.  Is that right?  Is that because of prop 13?  Is it the same in other states?

You are essentially right about California.  Property taxes can go up, but not more than 1% per year.  I believe even remodeling will only be additional taxes based on the value of the remodel, not a whole new assesment.
Prior to prop 13 people who chose their house location wisely were being forced out of their houses because the land became so highly valued, that they couldn't afford the taxes.  They may have bought a 5K house and be taxed on 1M property 30 years later.  

 

[wabmester]

I question the transfer of the EE bonds to the kids name.  Retitling the bonds doesn't create a taxable event.  Only cashing them in does that.

But if they were left in dad's name, then the kid would have received a stepped-up basis upon his death, right?

 

[maddythebeagle]

In my state (wisconsin), you can do a quick claim deed to relative (parent, offspring, andy maybe to sibling) without tax. There should be no "considerations" for this. I did that for a run down property in my family that couldnt be sold and rebuilt and remodeled it.

But I suppose that this lady needed the money from the sale to help pay her taxes on her residence. I suppose that she could have had the kids pay her taxes and nobody would have known the difference.... try putting old grandma in the slammer, lol.

 

[Michael]

She was spending 60% to 80% of her income, derived from Social Security and a small pension, on property taxes...

I suppose people could just vote to eliminate the property tax, but that would be too simple a solution.

 

[Martha]

Maddythebeagle, in Wisconsin there is no transfer tax levied by the county or state on transfers to family. There still might be other tax consequences. For example, a gift tax return might have to be filed, possibly effecting estate taxes later on. Also, the child's basis in the property will be the same as the basis held by the parent.

 

[maddythebeagle]

Martha: in my case, the property was passed down through the family so the last time anybody paid any money for purchase of the property was probably in the 50s. I dont think that I have any concerns without explaining the whole situtation. thanks. do you live in wis?

 

[Ginger]

In California, it is called Prop 13, a bill that was introduced by Howard Jarvis and thank goodness we have that in place for property taxes or we would all be out on the street since almost every home in Southern Caifornia is worth over $600,000. What other state has a similar property tax benefit in place

 

[wabmester]

In California, it is called Prop 13, a bill that was introduced by Howard Jarvis and thank goodness we have that in place for property taxes or we would all be out on the street since almost every home in Southern Caifornia is worth over $600,000.   What other state has a similar property tax benefit in place

I lived in CA for a long time, and I'm not a fan of prop 13.   It places the tax burden on new homeowners.   I.e., those who paid those crazy housing prices also have to pay crazy taxes.

In WA, where I live now, the system is more fair.   Assessed property valuations go up as property values go up, but the *overall* property taxes in a given county can't go up more than 1% in any given year.   So, those in neighborhoods with the highest appreciation pay the highest tax increases, but those higher taxes cause tax increases in other neighborhoods to be lower (and sometimes decrease) since the overall tax hike is capped.

 

[sgeeeee]

In California, it is called Prop 13, a bill that was introduced by Howard Jarvis and thank goodness we have that in place for property taxes or we would all be out on the street since almost every home in Southern Caifornia is worth over $600,000.   What other state has a similar property tax benefit in place

I was living in California when prop 13 was passed. I've always thought of it as short-sighted and a major contributor to the State's present financial woes.

Here's a link to a fairly balanced discussion of prop 13. There is some mention of what other states have done near the bottom of the article.

http://en.wikipedia.org/wiki/California_Proposition_13_(1978)

 

[Mr._johngalt]

I was living in California when prop 13 was passed.  I've always thought of it as short-sighted and a major contributor to the State's present financial woes. 

Well, it depends on whose ox is being gored, kind of like rent control in
New York. In every move the government makes (at every level)
there are winners and losers. Your challenge is to be in the winner's
column over time.

I don't wait for the government to help me. I watch what they do and then
try to turn it to my advantage.

JG

 

[Martha]

Martha: in my case, the property was passed down through the family so the last time anybody paid any money for purchase of the property was probably in the 50s. I dont think that I have any concerns without explaining the whole situtation. thanks. do you live in wis?

Don't live in Wisconsin but have owned property there. No problems in your situation so long as no one has a taxable estate or wants to sell and try to figure out the basis. My husband and his brother own a hunting shack in Wisconsin also passed down through the family. Since no one knows anymore how much was originally paid for the property (and I'm sure it's not much) we just assume there is no basis.

 

[maddythebeagle]

I think Colorado has something similar (Tabor)-tax payers bill of rights, I think it stands for. I think Wisconsin has tried but our governor doent like. From what I read Colorado's school's have suffered.

They have looked at a pilot program here of switching more to a higher sales tax.

 

[cute fuzzy bunny]

I like prop 13. If you have a home thats appreciated and you wish to sit tight, you dont get killed by higher property taxes. If you want to move into a more expensive home and pay the piper, thats your deal. Eventually everyone moves and the prices get adjusted. All the state misses out on is higher property values for what averages out to be a few years per home.

You also get rid of artificial assessment values determined by some tax assessor and the ensuing disagreements and appeals.

Not to mention it 'helps' the politicos 'resist' raising spending as they cant just up the property tax rates to suit.

Almost every tax is 'unfair' to some group or other but when you factor in a longer time period, it evens out. At least a little bit.

 

[Jarhead*]

I like prop 13.  If you have a home thats appreciated and you wish to sit tight, you dont get killed by higher property taxes.  If you want to move into a more expensive home and pay the piper, thats your deal.  Eventually everyone moves and the prices get adjusted.  All the state misses out on is higher property values for what averages out to be a few years per home.

You also get rid of artificial assessment values determined by some tax assessor and the ensuing disagreements and appeals.

Not to mention it 'helps' the politicos 'resist' raising spending as they cant just up the property tax rates to suit.

Almost every tax is 'unfair' to some group or other but when you factor in a longer time period, it evens out.  At least a little bit.

TH: Calif. doesn't miss much because of 13.

About 6 mos. ago, on PBS, they had a debate re: l3, and the effect on the state since inception. (Late 70's). Fact of the matter, Calif. has collected, per household, enough to place it in 5th. place out of all 50 states in taxes collected.
Both sides, 3 con, and 3 pro came loaded for bear, and the conclusion after a two hour debate, was that, according to the information presented, 13 was a win-win.

Calif. has also retained more of the retired guys that prev. to 13 passing would have been forced to move out of state, because of the valuations.

We have a very punitive state income tax for high earners, and a high sales tax, without prop 13, the state would be hard put to retain anybody.

 

[cute fuzzy bunny]

Absolutely. If they revalued my existing home, my prop taxes would jump substantially. I'd move to nevada, oregon or elsewhere in a heartbeat.

Right now, i'm not paying much in state income taxes, and I just dont buy enough stuff subject to the sales tax to care.

Half of the LA and SF area would have to sell and bail out of state if they took prop 13 out.

 

[JB]

And wouldn't that drive property values down, thereby reducing taxes?

I have a friend who's a really smart guy and got a great job offer in the bay area. Decided not to take it, too expensive to move the family.

 

[cute fuzzy bunny]

Most probably.

A lot of things look like good ideas until you carry them through to their ultimate conclusions.

 

[sgeeeee]

Well, it depends on whose ox is being gored, kind of like rent control in
New York.  In every move the government makes (at every level)
there are winners and losers.  Your challenge is to be in the winner's
column over time.

I don't wait for the government to help me.  I watch what they do and then
try to turn it to my advantage.

JG

Of course we all do that. But you can optimize your personal tax/benefit situation while the economy as a whole falls to pieces because of bad policy. There's no doubt that individual home owners who stay in one place pay less tax because of prop 13. But I know several good engineers who, on a regular basis, turn down job offers that would require them to move to California. California schools suck today. They used to be the best in the world. At least part of the reason for that change is prop 13.

In the absense of prop 13, natural market pressures would also tend to moderate housing valuations and taxes . Maybe that wouldn't have been as good, but I'm convinced it would have been better for the State.