Switching Primary Residence to a no-income-tax state

Actually, it seems more likely that _both_ states would claim you as a resident when it is to their advantage. At least in California, the other factors are more significant if you do not reside in the state more than half of the nights. (Note the word "reside". Daily commuters from Nevada to California have their work cut out for them, both for taxes and car registration.)

Not sure how you define "giant", as people who have lived in the same house for 30 years or more might save in the range of $4K-$6K/year in property taxes, and obviously these folks are beyond the age where they still have kids in the K-12 schools. The real problem is the commercial property owners who scam the system via joint ownership schemes which avoid triggering the re-assessment.

How did we get from "having your cake and eating it too" to having a "tax dilemma" that needs a "solution"? Asking if there is a legal way to avoid taxes is one thing; not being willing to pay the tax you reasonably owe and going to great lengths, most likely questionable, to get other taxpayers to subsidize your snowbird lifestyle is another.

Dunno about taxes where you live, but the total taxes on my four bedroom house here in upstate NY in a decent school district is $5800/yr. I'd say a 50% tax break is pretty giant.

In any event, Mass. is serious about 100% assessment, so there may be reasons to avoid selling a house there, but fear of a tax jump isn't one of them.

The problem was that, in the last 1970's the price of housing in CA rose so much so fast that a lot of people who had lived in their homes for years were forced to sell because they couldn't afford to pay the taxes. So property taxes are essentially frozen at the date of purchase value, plus an inflation factor of up to 2% per year.

As Mark pointed out, a large part of the problem is that the limitation applies also to business and commercial property. Before Proposition 13 business and commercial property were responsible for 40-45% of property taxes collected. Now less than

30% of property taxes come from business and commercial property.

If taxes are based on 100% value and prices go up quickly (in parts of California property values of gone up 50% or more in the last three years), I would imagine that a lot of people would fear a jump in their property taxes.

The problem was that the politicians absolutely refused to do anything about the problem, and just kept taking ever increasing tax revenue. So, the people stepped in and voted in proposition 13. Is it perfect? Of course not. But the politicians had ample time and opportunity to do SOMETHING. And they didn't.

Not if they have even a moderate understanding of the way that property taxes work. In case it's not clear, 100% of value means 100% of this year's value, not 100% of some number from the past.

The municipality passes a budget which includes the year's total tax levy. They divide that levy into the total assessed value of all of the taxable property, and that's the tax rate. If from one year to the next, the assessments were to double but the levy stayed the same, the rate would be half of the former rate and the taxes would be the same. I was on my village board for a decade and I can assure you this is how it worked.

The problem that Prop. 2 1/2 didn't solve was that before property records were computerized, computing consistent assessments was so hard that assessors didn't even try. They'd update assessments when a parcel was sold, and they'd do it if the owner challenged his assessment (I did that a few times back in the 1980s) but in general they'd just invent a percentage that was their guess of the ratio between the assessed price and the actual values, e.g. 75%, and discount new assessments to make them sort of comparable with the old ones. There were places that hadn't been reassessed for so long that the percentages were below 20%.

This worked well enough back when prices changed slowly and it was typical for people to live in one place long enough to pay off their mortgages. As you note, it doesn't work when prices are changing fast. The correct solution is what other states did, computerize the records and reassess every property on a short schedule, typically a 3 year rotation, so that everyone's assessment stays close to the actual value.

In California, on the other hand, in the dismal tradition of Hiram Johnson, there was Prop. 2 1/2 with short term populist appeal and long term distortions and problems.

More recently California had a problem that no amount of assessing can solve: fake sale prices. Around here, our bankers live in the communities they serve, and they've told me they'd never make a mortgage unless they believe that the borrower can pay off the entire thing out of his or her income. (I refinanced a while ago and the banker, who knew my house from having mowed its lawn when he was a kid, said take a 15 year loan, you can afford it and you'll pay it off. He was right, except that I took his point to heart and paid it off early.) This ties prices to real incomes, and we never had a bubble. In California, houses went for absurd prices unrelated to anything other than someone's hope that they'd be able to flip the house to a buyer even more gullible. In that hyperinflationary environment, prices don't mean much. But that was, I hope, an aberration.

That is NOT how it worked in California before Proposition 13. The tax rate did not change, and tax bills went through the roof. If the politicians did something like this, or kept the budgets under control, or not to grow by more than the rate of inflation plus the change in population, maybe there never would have been a Proposition 13. But the politicians did nothing other than collect the ever increasing property taxes.

I believe you, but in a less broken state it would have been as easy to pass a fair proposition mandating 100% assessment on a three year cycle as an unfair one creating a privileged class of people who haven't moved for a while.

Thanks for that information. If that had been how it worked in California, Prop 13 wouldn't have ever been an issue. In California a rate of assessment was established, and you paid that rate based on the market value of your home, period. So in the

1970's if the value of your property doubled, so did the property tax. Even some wealthy people had to sell homes they could no longer afford because property tax on them got so high.

That might not have been an issue in your town, but it was a problem over most of the country, not just California. Mortgages were bundles and sold as investments - in many cases loans of even more than 100% of the value of the property. Bankers had no motivation to give loans only to people who could afford them, because they cashed out soon after the loan was made and the loan was gone.

And people who sold loans were paid commissions, so they would try for loans for anyone they could convince to try to buy a house. Loan teaser rates (e.g. very low rates for the first six month) made people feel like they could afford homes they couldn't, and that exacerbated the problem.

And then there were credit default swaps (essentially mortgage insurance for the lender). Insurers sold these even to people who had no insurable interest in the loans insured. They thought their risk was low, so they sold them incredibly cheaply. But because unrelated people could buy insurance on the loan on your house, if your house went into foreclosure, then perhaps a dozen or a hundred people had to be paid off.

Those things are (hopefully) no longer an issue.

[...]

My understanding is that it isn't simply allowing commercial property to fall under Prop. 13 itself that is the problem, but rather that even when ownership has changed for all practical purposes, various entities (LLC, corp, etc) are set up using technicalities to avoid triggering a change of ownership for re-assessment purposes.

In one case, $200,000 of annual property tax was "avoided".

Excerpt:

"E & J Gallo Winery purchased the Louis Martini Winery and almost 1,000 acres of vineyard Martini owned.

"Twelve members of the Martini family owned shares of the corporation, but none owned more than 50 percent ? a key element of the state?s definition of change of ownership, said Napa County Assessor-Recorder-Clerk John Tuteur.

"Gallo structured the sale so 12 members of the Gallo family bought the shares in identical quantities, thus skirting the state law and allowing the property to change hands without a new assessment, which Tuteur estimated would have been $20 million to $30 million.

"Today, almost all of the property retains assessments predating Proposition 13?s passage in 1978, allowing Gallo to save about $200,000 annually in its property tax bill, "

[...]

I should add, as a follow-up, that residential real estate owners also avoid taxes in several similar ways, such as gifting real property to children in certain structured ways, or moving from one county (sale) in CA to another county (purchase) and carrying some if not all of their artificially low assessment with them.

That loophole has now been closed.

Back to the original problem. It had nothing to do with real estate tax or ripping off Uncle Sam. And there's no problem moving to another state while still maintaining property, say, a vacation home, in the original state. Millions of people do it legally.

And there's no law in selling a house early so one can pay the capital gains tax on the sale (even though there is a $500K exclusion) because it was a primary residence at the time of the sale. The state capital gains tax would be paid.

Here's an analogy to put things in perspective. Say there is an identical house next door to my house in MA. I sell my house and get the $500K exclusion on the sale because it's my primary residence. Then I immediately purchase the neighbor's house. Finally, I change my legal domicile to Florida so I no longer have to pay income taxes to MA. So I've legally accomplished what I wanted to accomplish. No more state income tax, a $500K exclusion on the capital gains from the primary residence sale and I still have a substantially identical house in MA to still use as my vacation house for less than one-half of each year.

So, why can't I do the financial equivalent; i.e.just repurchase my original house after it's been sold? It's a difference without a distinction. Except, in the latter case, it might be deemed a sham sale. Who knows? You'd think Uncle Sam would be happy if I harvested a capital gain early ... it's the opposite of deferring a capital gain.

In theory you can do what you want. The problem is that the IRS will see it as you trying to get two $500,000 exemptions for the same property without there ever having been a meaningful change of, well, anything, really, even if you do pay some capital gains tax now.

If you buy your neighbor's house instead, that is more than a formality - there are real, actual issues that will or may come up that won't if you do it with your same house.

If they allowed you to do what you propose, everyone with a house would do the same thing every two years, and wipe out nearly all capital gain on the sale of residences. That is not what the law contemplates.

Why? Because people hate you for being successful, that's why. (I don't.)

How about you sell the house and take back a mortgage. After a couple of years the buyer stops paying on the mortgage and moves out. You foreclose and the house is yours again. And the buyer essentially paid rent for a couple of years.

Stu, under his scenario, he would not ever be claiming a second exemption for that same MA house.

Perhaps I am wrong. AB 2372 did not pass, and I believe this is what I was thinking of.

Sec 121 exclusion and mortgage interest itemized deductions are government welfare for the well-off, some of whom disdain government welfare for others besides themselves.

Isn't elimination of these tax breaks shot down every time Congress takes a hypocritical stab at tax reform?