San Francisco property values have consistently appreciated at a greater rate than inflation. Instead of a modest 3 or 4 percent growth rate like you’d otherwise realize nationally, we instead talk about 7 percent annually with folks regularly realizing 30–40 percent gains. The 30-year trend for annual appreciation rates for the City is something in the 7 percent range. Selling a property in San Francisco is likely to have consequential tax implications.
Sellers usually have two questions when they think about selling:
- “Where will I go next?”
- “Taxes. How much will I have to pay?” and, “what can I do to minimize the burden?”
Putting aside the big issue of what a post-tax, net budget will get you in San Francisco, some sellers reject the idea of selling altogether because of considerable capital gains tax obligations that a sale would impose on sellers — an average of 37% or more. This runs the legitimate (and demonstrable) risk of distorting the marketplace as folks refrain from selling out of fear of having to pay large sums of capital gains taxes and/or out of fear of losing a low property tax assessment basis as guaranteed by California’s Prop 13. More on that later. For now, know that the Tax Code and other propositions can be used to minimize various tax obligations.
Take note: while we field a lot questions about what kinds of taxes or exclusions apply property sale, we are not tax professionals. Yes, we’ve seen enough examples of what happens when a property is sold to give our clients a general sense of what could happen with a sale. Hiring a qualified CPA and/or qualified estate attorney is critical so don’t overlook this step; it’s something that is well worth the cost given the host of issues and questions that will arise.
Here’s the good news: if you are selling your personal primary residence — well, at least one of a possible two primary residences — it’s possible that a big portion your gains will be tax-free. This depends on a few criteria below. But because we’re San Francisco and because it is also home to some of the most valuable real estate in the country, it’s more likely that a lot of your gains will also be taxable — just how much depends on your circumstances and what you’ve done during your ownership. But for owners of investment properties there are other devices that will delay when you pay those taxes that may also wipe out tax obligations for your heirs.