We purchased a California primary residence in 1979 under Prop13. Husband and I moved to a rental in 2007; daughter remained in house. We rented out house starting in 2011. If we sell in 2013, do we lose the Prop 13 carryover and our income tax exclusion? (We are both over age 55)
3 Answers from Attorneys
I'm not sure what you are referring to as Prop. 13. The proposition 13 that I know of and deal with is the one having to do with property taxes. When you sell your house, the new owner will pay property taxes at the new assessed value as of the date of the sale, unless they meet an exclusion. That has nothing to do with you and your income taxes.
In addition, the prime residence occupancy rules (two years out of five, etc.) that you seem to be referencing have to do with Federal and state capital-gains taxes, not property taxes, which are the subject of Prop. 13.
Mr. Whipple and Mr. Roach seem not to be familiar with the modifications to Prop. 13 to which you refer, which were made by Propositions 60, 90 and 110. The short answer is that you have already lost your "over 55" base year value transfer rights by moving to the rental and living there for two years or more. The property you sell must be YOUR principal residence within two years of when you seek to exercise the transfer. Your daughter living there is irrelevant, and of course once you rent out property it definitely is not your principal residence. So you would have to move back in and re-establish the property as your principal residence. Once you do that, you would be able to sell and transfer the base year value, or you could even sell and move back to a rental, and you would have up to two years to buy another property to live in and apply to transfer the base year value.
As for your "income tax" exclusion - I assume you mean your capital gains tax exclusion since that is reported together with other income. Again you already lost it. You must occupy the property as YOUR principal residence for two out of the last five years before you sell it in order to qualify for the exemption on the first $250k individual/$500k married of capital gains on your principal residence.
So the bottom line is that, having moved out six years or so ago, you now must move back in and live there for two years minimum if you want these tax benefits. After two years you could sell and immediately take the capital gains exemption, and then would have two more years to buy another principal residence and transfer the base year value of your current property (assuming the new property qualifies under the other requirements of the transfer rules, and is in the same county as the one you own now, or is in one of the eight counties that allow base year value transfers from other counties (Alameda, L.A., San Diego, Santa Clara, El Dorado, Orange, San Mateo and Ventura)).
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