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Doesn't want/need a 3.6L
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Property Tax Loopholes?
Well, first post into OT but I thought I would ask you advice:
Background info: I currently own a 1875 sq.ft home in South Orange County that has a selling value in the $650,000 - $700,000 range. It is 4 bedrooms and 2.5 bath with a small 2 car garage. Property tax is approx. $5K per year. We bought the house new 7 years ago for $215K and estimate that we have $400,000-$450,000 in equity. We are happy and not really looking to move as we only have 1 child and we enjoy a modest yet comfortable lifestyle. BUT, we have an opportunity to buy a much larger home only a couple of miles away (same city) at a price under market value. It is owned by a friend who is selling and moving to Arizona. He paid for the house in cash so he is not hurting for money. He just doesn't want to go through the hassle of getting a realtor, showing the house, paying the fees, etc. This house is 2,610 sq.ft with 5 bedrooms and 3 bath and features a large yard and 3 car garage. The house has EXTENSIVE upgrades, everything is first class. Comps in the area with the same layout are in the $900,000-$1.05 mil range. I would be buying it for $850,000-$875,000. It's "only" $150,000-$200,000 more than my current home. A no-brainer, right? Well, the increased property taxes are my stumbling block. The property taxes (which are based on the puchase price) would jump per year from my current $5K to around $14K!!! This represents an approx. $400/mo to $1,200/mo difference. It's this last $800/mo that will be burdensome. I am fully prepared to cut back our lifestyle somewhat (eating out, lavish vacations, etc) to make this work. The elementary school my son would attend is better than his current school and I would have PLENTY of room to work on the 911 at home! Not being too familiar with real estate and tax laws, are there legal ways to bring the purchase price down so the property taxes won't be as high? I know that you can do a $11K cash "gift" per person (which could be $44K in this instance since they have 4 family members) but are there other legal ways? Can I do a side deal where I pay him cash? Can I buy the house at a low dollar value and immediately take out a 2nd to pay him the difference? Everything has to be legit, I have no interest in getting me or him in trouble. I fully realize that if we don't take advantage of this opportunity it will kick me in the groin for years to come, but we still have to eat. I am a conservative guy with financial dealings and just would like to hear a few other viewpoints, either yea or nay. C'mon guys, talk me into it or talk me out of it with some good advice.  Ralph |
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05-14-2005, 09:40 AM
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A Man of Wealth and Taste
Join Date: Dec 2002
Location: Out there somewhere beyond the doors of perception
Posts: 51,063
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Property taxes in CA are 1.25% of the PURCHASE PRICE of the home...thus with 875K...that equates to about 10K per year...you will just be paying out the free equity you got by making this deal over a period of years... I hate taxes....
A nicely upgraded house...meaning turn key...do nothing to..plus buying it under market...is worth the sacrafice...If U don't like it in 2 years turn it.... This is something that I havn't considered before...with the massive price apprecaition in home prices...come massive increases in prop taxes....(only if you buy, if you stay in your old home taxes look cheap) ...at 10K per year that $850 a month in prop taxes...sooner or later that going to weitgh on the market as that cost doesn't go away... And people say there isn't inflation in the market place....
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05-14-2005, 10:02 AM
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Registered
Join Date: May 2005
Location: Wichita KS
Posts: 599
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Glad I don't live in Cali......
My 2924 sq. ft, 1462 main floor and 1462 full finished basement, with 3 bedroom 2 baths on the main and 2 bedrooms 1 bath basement, 2 living areas, a storage room, giant laundry room and oversized 2 car garage was $125k turn key. Property taxes are still a killer though at nearly $2k per year.
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Jack 86 Porsche 951 - LR 3" Exhaust, MaxHP chips and ProfecB @ 15psi 83 Porsche 944 - Still under re-construction. 08 Suzuki Boulevard M109R LE 02 Nissan Altima SE3.5 |
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05-14-2005, 10:09 AM
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Too big to fail
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My question is where is all this property tax money going? Especially in California, with the state and counties whining they don't have any money.
My property taxes are ~$2700; they raised them ~$300 when I built the shop.
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"You go to the track with the Porsche you have, not the Porsche you wish you had." '03 E46 M3 '57 356A Various VWs |
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05-14-2005, 10:31 AM
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What I have learned is the county taxes on two grounds, the value of the land and the value of the structure. The latter is what is set by the sales price paid in the purchase. The land will be taxed based upon the comps in the area.
I had a friend who did the same thing you are thinking about. He paid much less than the sales prices of the home in Laguna Niguel. The county set the property tax at the market value. This was a difference of $400,000 in valuation! So in short, his purchase price did very little to establish the rate of property taxes. He appealed the county's valuation in court and did get a reduction, but it took about a year to do so. I do not think there is a simple way to position yourself to pay lower taxes in the purchase of a home. It simply goes against the principles of the government to collect the most taxes possible. Good luck.
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05-14-2005, 10:35 AM
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Doesn't want/need a 3.6L
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Quote:
 Makes a big difference. This house is "turn-key", the only thing I will do is turn his "Sea-Doo" area of the garage into a 911 workshop area.If only there was a way to transfer my current 5% interest loan to the new house, the rates are somewhere in the 5.75%-5.85% range right now for a 30 year fixed I believe. This would also represent a significant savings that could be applied to the property taxes. Wishful thinking though... I could do a simple interest loan and than it would be no problem short-term, but IMO this is really playing with fire. A couple of my buddies in this business are all writing these for customers at present but warn them that this might bite them in the backside in a couple of years. They say that this is the only way that many people here in SoCal can get into a decent sized home. Too risky for me. Ralph |
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05-14-2005, 10:50 AM
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Doesn't want/need a 3.6L
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Quote:
Yes, this is what I kind of understand as well, although I was under the assumption that the property tax would initially be based on the purchase price of the house/property and than "adjusted" the following year based on the comps in the area. This might be flawed thinking however. No way will I flip this house, this is the development that I was looking to buy into 7 years ago and couldn't swing it. I love this house and the upgrades that have been done, will be a very good location for a Pelican BBQ! We may be eating Top Ramen for awhile and the boy might be going to school without shoes, but am really going to try and take advantage. Anyone want to buy a stucco box in So. Orange County for $700K? Ralph |
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05-14-2005, 10:58 AM
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Registered
Join Date: Oct 1999
Posts: 329
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I would hope you have an accountant who could explore means to utilize this extra tax burden to your advantage. There is some good advice here but really there has to be better sources of information. Im sorry but I cant help but laugh when you mention cutting back on eating out to afford a million dollar home. I realize California real estate is out of touch with the rest of the country but even in the midwest if you cant afford it "you cant afford it".
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05-14-2005, 11:09 AM
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Doesn't want/need a 3.6L
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Quote:
What's real funny (actually more like sad), is that a $1,000,000 in many parts of SoCal is really not that impressive. Just normal looking neighborhoods with normal middle class/upper middle class families. My buddie's new house that he just bought in Phoenix (actually Chandler) is 5,500 sq/ft for just over $400K. Puts things in perspective. But you're right, it all boils down to if you can't afford it, you can't afford it. Doesn't really matter where you live or how much the house costs. Ralph |
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05-14-2005, 11:41 AM
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Registered
Join Date: Jul 2001
Location: Huntington Beach, CA
Posts: 2,685
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Ralph,
There is very little ways around it. In my line of work, we develop low income apartments, and in California if they are owned by a 501 (c) 3, we get the 1% abated each year, but having a qualified low income family living in the unit. This is the only way low income apartments can be built in California. Knowing that, we have many cities that will not approve new deals, because they know they arne't going to be getting there tax dollars, so they make us do inleiu of payments. In short there is very little, and cities and counties are looking at all ways to close the loop hole. If you are buying such a house, I would suck it up, buy the thing and enjoy living in a great area. Michael
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1984 Carrera Targa Sold to fellow Pelican 1973 911S Targa - Sold to fellow Pelican. |
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05-14-2005, 11:42 AM
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A Man of Wealth and Taste
Join Date: Dec 2002
Location: Out there somewhere beyond the doors of perception
Posts: 51,063
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Quote:
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05-14-2005, 12:21 PM
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A Man of Wealth and Taste
Join Date: Dec 2002
Location: Out there somewhere beyond the doors of perception
Posts: 51,063
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Quote:
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05-14-2005, 12:27 PM
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A Man of Wealth and Taste
Join Date: Dec 2002
Location: Out there somewhere beyond the doors of perception
Posts: 51,063
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I sometimes go through home listings in my old hood as well as my new hood (zip code).....
In my old hood a house a block away with the same floor plan but 10 years older (1980) was listed last fall for 949K....now it's listed for 899K....my old hood is real difficult to appraise cause no one moves...new Toll Brother homes 4500 sq ft are going for 1.2M... My new hood prices for 3700 sq ft - 4000 sq ft Single story homes go from 689K to 850K.....I could buy a 3400 sq ft Toll Brother home for 750K....such a deal.... I was surprised by the bump in prices.....my next door neighbors 3000 sq ft house is listed at 549K....which would put mine at 677K ..... so it looks like my area of LV is still going strong...the cheapest home with my sq ft and floor plan is listed at 720K....
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05-14-2005, 12:38 PM
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Registered
Join Date: May 2005
Location: Wichita KS
Posts: 599
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Quote:
Heheh, well technically, I guess I'm stuck for 29 1/2 more years  We just bought this place in November, and I actually think the value jumped up another $10k since then(got the county tax appraisal a month back)..... Property values are on the rise along with interest rates.... It kinda sucks for those that are looking for a new home.
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Jack 86 Porsche 951 - LR 3" Exhaust, MaxHP chips and ProfecB @ 15psi 83 Porsche 944 - Still under re-construction. 08 Suzuki Boulevard M109R LE 02 Nissan Altima SE3.5 |
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05-14-2005, 12:49 PM
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Doesn't want/need a 3.6L
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Quote:
I agree with you, there may be a big implosion coming here. Maybe I should just lay in the weeds for a couple of years and pounce when a rash of homes are foreclosed on. Nah, I want THIS house.  Ralph P.S. - This OT stuff is kinda fun! |
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05-14-2005, 01:03 PM
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Join Date: Jun 2003
Location: St Petersburg, FL
Posts: 3,814
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Quote:
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05-14-2005, 01:42 PM
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Doesn't want/need a 3.6L
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Quote:
I don't see homes out here radically decreasing in price, it will just mean that people will be stuck in the short-term and won't be able to move in conjunction with higher interest rates. People are still getting full market value for their house here, but rather than the house selling in a week or two it is now taking a month or two. It will be tough for people to move though, with the historic lows of interest rates everyone has now refinanced at least once or twice. I think it will be awhile before we see 5% and lower again. Long-term, the price of housing here is going to increase further IMO (this has been the trend for the last 30-40 years). For some reason, everyone wants to live in California even though corporations/companies are packing their bags and getting out due to California's non-business friendly policies. It's just the high property taxes out here that are a real bummer, even though you can write it off on your taxes it still is a small consolation. Besides, I like Top Ramen. Ralph |
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05-14-2005, 02:13 PM
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Snark and Soda
Join Date: Aug 2003
Location: SF east bay
Posts: 24,609
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Ralph- I think you're "screwed" on the tax idea, unless:
- you or your wife is 55+ or disabled, and - you could bring down the purchase price of the new home to within 105% of the selling price of your existing one. (Doubtful there's enough land at the new place to do a lot split to decrease the value of the portion with the house on it, right?) http://www.boe.ca.gov/proptaxes/faqs/reappraisal.htm Even if property values take a dip, you'd probably suffer a somewhat similar dip with the house you're currently in, as the values are not that dissimilar. High-end houses usually take a bigger hit than the bread-and-butter houses when the market dips. Another thing to consider is, if you sell your current house now you can walk away from up to $500K in capital gain. You're already getting near the limit, so if you sell now you can "wash" your gain and start over on the next place. The other issue is financing. You'll be giving up the interest rate you now have for a new one, probably higher if you refinanced at the bottom. How long would you have stayed at your current house, and how long is your current rate fixed? How long will you stay at the next house? (Probably a while, since you have a son in elementary school). If you're planning on staying put 10+ years, you should have a 30 year fixed mortgage, otherwise you'd be playing with fire (being a conservative guy). I believe rates will go up, even though long-term rates haven't actually gone up that much yet. It sure seems like there's more upside potential to rates than them ever going down much from here. You can split the baby by getting a 30 year fixed mortgage that's interest-only for the first 10 years to give you a lower payment option until your income catches up. Those rates are around 6% without you paying points. (Just multiply your loan amount by 0.5% for the payment). If you avail yourself of 10 years without paying principal, the loan will basically become a 20 year fixed that's fully amortized and the payment will skyrocket if you want to avoid refinancing at a higher rate. Or maybe 10 years from now (or sooner) you'll be ready to move and wash another $500K of gain... and pay higher taxes and likely interest rates...
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05-14-2005, 04:56 PM
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Join Date: Apr 2000
Location: Mid-life crisis, could be anywhere
Posts: 10,382
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Ralph,
This is really simple... you want to buy a house for your family. This is a long-term decision. Get the 'bubble' mentality out of your vocabulary!!! Doesn't matter what values do in the short term. You're in this for the long term. The only question is how the additional $800 a month will impact you. It sounds like you can easily cut $500 a month out of your budget... another hunsky or two should be easy. You'd be surprised how easy it is to cut A LOT of expenses out of your budget... if you give it a little effort. Just the fact that the school is better for your child should be good enough. I say do it!!!!!!!! And don't look back.
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'95 993 C4 Cabriolet Bunch of motorcycles |
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05-14-2005, 04:57 PM
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Doesn't want/need a 3.6L
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Thanks Mr. Carlton, Richard & everyone else who responded, like Michael says I should just bite the bullet and pull the trigger.
I think it's fairly transparent that I want to do this. I'm only a short drive from Richard's house, maybe my family can eat at your place a couple of times per week? BTW, shouldn't you have been at Willow today??? Ralph P.S. - 88Blue, where in the heck do you live if you don't mind me asking? Almost 3,000 sq/ft for $125K? 
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05-14-2005, 09:28 PM
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1988 Porsche 911 3.5L Motronic Twin-Plug
1978 Porsche SC Targa 3.6
