This tax season, Americans are grumbling over the usual government forms, bureaucratic red tape, and looming deadlines. But it’s worth stepping back to realize the IRS isn’t responsible for the mess. That fault lies with Congress, where lawmakers spend their days conferring with their constituents, debating weighty issues, marking up legislation, and who are we kidding? They spend their days grubbing for campaign cash and their nights spouting talking points on cable news. (If an ambitious young senator were to write an update to JFK’s Profiles in Courage, who would he write about in today’s Congress? Discuss among yourselves.)
It’s also worth remembering that some of the best (or worst) ideas come bubbling up from state and local governments, aka “laboratories of democracy.” Love/hate Obamacare? It started out as Romneycare in Massachusetts. New York has a complicated tax system, with a 10.9% top bracket, that just happens to chase millionaires down to Florida. Meanwhile, Texas has no state income tax, nicer roads, and a faster-growing economy. So let’s take a look at a couple of ideas percolating out where real people live.
Arizona is full of snowbirds from colder, frostier places where the wind comes sweeping down the plains. Many of them are retirees, living on fixed incomes, and struggling with inflation. State Representative Rachel Jones has introduced a bill to make their lives easier by eliminating property taxes for people who own their primary residence outright. But the current draft raises important questions. For example, there’s no exemption for reverse mortgages that let older owners tap the equity in their homes without having to make payments or move. And, while Arizona boasts one of the lowest property tax rates in the country, there’s no provision for replacing the revenue the state would lose from the bill.
Further west, in Los Angeles, Million Dollar Listing Los Angeles star Josh Altman is dangling a $1 million bonus to any agent who can help close escrow on a $27.9 million property before April 1. The Bel Air house includes 12,130 square feet, with seven bedrooms and 14 bathrooms on 1.3 acres with views of the ocean. There are two infinity pools (because having just one pool is for peasants), an indoor atrium with a water wall, a 12-seat theatre, and an indoor-outdoor gym.
Why the April deadline? In 2022, Los Angeles voters passed a mansion tax to fund affordable housing and tenant assistance programs. That tax is four percent on sales above $5 million and increases to 5.5% on sales above $10 million. Notably, it applies to the entire sale price, not just the amounts above those thresholds. And you owe even if you lose money on the sale. If Altman’s listing sells for the asking price after March 31, his seller pays $1.53 million.
Naturally, planners are already floating ideas to skirt the tax. How about splitting a sale into two transactions, one for the land and one for the structure? What if a buyer splits the purchase with a trust, taking two separate tenancy-in-common interests on two separate closing dates? (It sounds silly, but that’s why tax lawyers drive Jaguars.)
Both of these proposals run counter to federal law. The 2017 tax act limited deductions for state and local taxes, including the property taxes Arizona might eliminate, to just $10,000 per year. And federal law currently lets homeowners exclude up to $500,000 gain selling their primary residence. No mansion tax there!
You already know that having a plan is the best way to pay less tax. But it’s important to keep that plan up to date as laws change, and your own circumstances change. If you’re thinking of moving up or down, call us before you sign a contract so we can help you keep as much as you can!