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How SB 9 Will End Single-Family Zoning in California

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California Gov. Gavin Newsom signed into law two new housing bills, SB 9 and SB 10, that will essentially end single-family zoning and increase the state’s housing production. Though it remains to be seen whether the new laws will help alleviate California’s mounting housing crisis, the legislation will begin to impact homeowners and developers at the start of the new year.

SB 9: The Basics

Beginning on January 1, 2022, SB9 will allow the development of up to four residential units on lots typically reserved for single-family homes. Developers and owners can increase their units in a few ways: Divide a single-family lot into two lots and add a second, single-family home onto the newly created lot, or place two duplexes onto the two lots.

Currently, California’s single-family zoning laws only allow for an accessory dwelling unit or an attached unit 500 square feet or smaller alongside a home (also known as a junior accessory dwelling unit).

SB 9: The Requirements

SB 9 only applies to lots in single-family residential zones located within cities or urbanized portions of an unincorporated county that include an “urbanized area or urban cluster,” as defined by the U.S. Census Bureau. (The bureau’s proposed classification for the 2020 Census seeks to define urban areas and clusters as areas with at least 4,000 housing units or a population of at least 10,000 people. But in the 2010 Census, urbanized areas were defined as 50,000 or more people while urban clusters were between 2,500 and 50,000 people.)

Properties built on these lots cannot be used for any business purposes, and single-family lots in historic districts and landmarks are also excluded from upzoning under SB 9.

Under SB 9, owners and developers cannot demolish or otherwise alter affordable housing, rent-controlled housing or housing that has been occupied by a tenant in the past three years. 

To split a lot, an owner or developer will have to submit an application to a local agency, which will approve or deny the request based on specific requirements relevant to that city. But for the most part, local government officials can only deny a request if the proposed project would have a “specific, adverse impact” on “public health and safety or the physical environment” and if there is no “feasible method to satisfactorily mitigate or avoid the specific, adverse impact.”

Newly split lots must be at least 1,200 square feet each, and one of the two lots may not be smaller than 40 percent of the original lot. New units created on these lots cannot be used for short-term rentals, meaning that they must be rented for more than 30 days. Homeowners must also live in one of the units as their primary residence for at least three years if they choose to split their lots or add new units.

What about SB 10?

SB 10 is meant to make it easier for cities to develop apartment complexes with a maximum of 10 units in neighborhoods close to public transit by allowing local governments to bypass the approvals process under the California Environmental Quality Act. By streamlining the process, the idea is that more affordable and accessible housing can be created at a faster speed to address California’s housing crisis.

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Biden’s Tax Plan

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President Biden unveiled a $3.6 trillion tax plan earlier this year that could have significant tax implications for real estate investors, inheritors, and married couples making $509,300 or more a year, or single individuals making $452,700 or more a year.

The plan still needs to be approved by Congress and has already received significant pushback from Republicans and some moderate Democrats. But if it does go through as proposed, here’s how real estate sales would be impacted.

Real Estate Inheritors Could Owe Higher Capital Gains Tax

The proposed tax plan would eliminate the step-up in basis provision, which currently adjusts the value of an inherited asset, like real estate, when it is passed on after the original owner’s death. The new tax proposal would prevent individuals from avoiding capital gains tax when selling inherited real estate that has gains exceeding $1 million (or $2.5 million for married couples). Instead, the inherited property will be assessed at market value and the inheritor would be liable for capital gains tax at that new tax base.

Here’s how that might look: Under current law, if you inherited a townhome in Cupertino from your mother that is now worth $1.6 million —at the time of your mother’s death — but was purchased in 2005 for $500,000, you would not have to pay capital gains tax if you sold the property at the $1.6 million price. But under the proposed tax plan, if you were to sell the Cupertino townhome after inheriting it, your gain would be $1.1 million, so you would be subject to capital gains tax on the excess $100,000.

Exceptions to the rule are family-owned businesses, so long as the heirs continue to run the business, as well as properties donated to charity. But for children expecting to inherit and sell expensive property from their parents or other relatives, a potential elimination of the step-up in basis provision could be significant.

1031 Exchange Limits for Real Estate Investors

Real estate investors can currently use 1031 exchanges to defer capital gains tax if they exchange one investment property for another of equal or higher value, with capital gains tax only being due when an investor finally sells an investment property for cash.

Under the new tax proposal, investors may only defer capital gains tax up to $500,000 for individuals or $1 million for married couples filing a joint return for like-kind exchanges. Investors would then be subject to capital gains tax on any profit above the $500,000 or $1 million threshold.

For example, if you originally purchased a property for $500,000 that is now worth $1.5 million, you will be subject to capital gains tax on the
$500,000 that exceeds the threshold, even if you wanted to invest that profit into another investment property.

Long-Term Capital Gains Tax Increases for Top Earners

Capital gains for those making $1 million or more a year would be taxed as ordinary income under the proposed tax plan, meaning that top earners would be subject to a 39.6% tax rate — up from 20% for that income bracket.

There’s no reason to fret just yet, given that the plan will likely undergo some changes as Congress reviews the tax plan, but it’s always good to be prepared.

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Why is Lumber So Expensive?

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Greetings!
Hope all is well and you are enjoying some semblance of return to normalcy with California reopening.  For a great primer on what that means, the Mercury News put out a helpful FAQ.
Market Update
 
From a macro perspective we’ve seen home prices continue to hold with the greatest increases in the single family home market.  Many clients/friends have asked if this rise in housing prices can be sustained.  For an answer, we thought it might be useful to look at the costs to build.  The thought being that the more that costs for home building rise, the more new homes and existing homes cost.
Lumber Increases
Anecdotally, many have head that lumber prices have gone up during the pandemic (along with rental cars, boba, toilet paper, and microchips).  Over the past year, the price of lumber in the US has gone up by as much as 377%.
 
Wood that typically sells for $200-$300 per 1k feet hit nearly $1.7k in early May.  This jump adds ~10% to the average price of a new single-family home in the bay area.
Reasons for Lumber Increases
Problems in the lumber market started long before the pandemic as the years following the Great Recession (2007-2009) led to a dramatic decrease in home building as new housing starts ground to a halt.
As a result, US lumber demand plummeted by 49% and 30+ large sawmills went out of business.  At the same time, Canada, which typically provides 1/3 of the US lumber supply was hit by the perfect storm of unfortunate events including an infestation of bark-eating beetles killing 60% of British Columbia’s salable pine and wildfires in 2017 and 2018 destroying another 6.2m acres of would-be lumber.
When the pandemic struck in 2020, many initially assumed that the housing pullback of the Great Recession would repeat itself.  By April 2020, sawmill operators had cut back output capacity by 40%.  However, something strange happened, demand for lumber didn’t go down but went up!
Record low home interest rates, stimulus cash, and more time at home led to a boom in remodels and new construction ratcheting up lumber demand.
What’s Next?
Although no one is sure how long the lumber shortage may last, lumber futures are showing a downward trend as high lumber prices have turned normal business lumber buyers into sellers and factories scramble to ramp up production.
Hope you and your loved ones are managing well and as always, feel free to contact us with any questions, real estate related or otherwise.
Cheers!
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Why You Should Rent Out Your Primary Residence Before Selling

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There are two things in life that are certain: death and taxes. And if you’re about to sell a property, then you know what’s coming next: capital gains tax.

In the context of real estate, capital gains taxes are taxes that you owe for profits you make from the sale of a property. Homeowners may be aware of how to use capital gains tax exclusions and 1031 exchanges to their advantage, but there’s a way to save even more by utilizing both.

First things first:

What does Section 121 do?

IRC Section 121 allows $500,000 in capital gains tax exclusions for married homeowners on their primary residence and $250,000 in exclusions for single homeowners, meaning that the first $250,000 or $500,000 in profit that a homeowner makes on their primary residence is exempt from any California or federal tax.

To qualify for this exemption, you must have:
1. Owned the property for at least two years;
2. Used the property as your primary residence for at least two of the past five years;
3. Cannot have used the Section 121 exclusion in the past two years;

This effectively means that you can rent your home for up to three years and still pocket the $250,000 or $500,000 exemption.

For example, if you and your spouse purchased your home for $500,000, meet the aforementioned requirements, and sell it for $1 million, you will not owe any capital gains tax because the gains in this instance amount to $500,000, which is the exempt amount for married homeowners under Section 121.

How does a 1031 exchange work?

If you’re selling in Silicon Valley — where average home prices run in the millions — and looking to keep more profits with the sale of your home, you may still face a hefty capital gains tax, despite the Section 121 exclusion. This is where a 1031 exchange can be used to your advantage.

The 1031 exchange, named after IRC Section 1031, involves an exchange of one investment property for another of equal or higher value. Since an owner is placing any profit received from the sale of one investment property into the purchase of another, the rationale is that the owner does not need to pay capital gains tax because they have not cashed out any of the “gains” made.

There is no limit to how many times an owner can defer their capital gains taxes through this exchange method; the capital gains tax will only be due when the owner eventually sells their investment property for cash.

How can both Section 121 and a 1031 exchange be used to my advantage?

If you rent out a property for a year or more, it may qualify as an investment property eligible for a 1031 exchange. This means that if you have both lived in that property as your primary residence for at least two years and later rented it out, it can qualify as both a primary residence and an investment property. A homeowner can pocket the untaxed $250,000 or $500,000 that you gained from the sales proceeds (via IRC 121), and ‘roll’ the remaining proceeds into an investment property and pay nothing in capital gains.

Let’s say you’re a single individual who purchased a townhome in Cupertino for $500,000 in 2005 that is now worth $1.5 million. If you sell the property immediately after living there as your primary residence, your tax base will be $500,000 and you will be exempt from $250,000 under Section 121. However, you will be responsible for paying capital gains tax on the remaining $750,000. At a 33.3% tax bracket (20% top federal capital gains bracket, 13.3% top CA bracket), you as the seller would have to pay $249,750 to the federal and state government in taxes.

Instead, if you rented your home for at least a year before selling, you can use the
$249,750 that you would have owed in taxes and invest that money into another investment property in any state. Depending on where you’re looking to purchase, that money could be enough to buy a property outright without financing or used toward a down payment on a single-family home or duplex.

What’s the catch?

There are timing considerations to keep in mind when conducting a 1031 exchange and managing a rental property, especially one that is far from where you live and be a lot of work. Additionally, conducting a 1031 exchange means you may still pay capital gains taxes at a later date (although we have strategies for that as well).

That being said, each situation is unique and it’s always best to consult with your CPA/attorney before making any big financial decision. Luckily, the Kei Realty Group is composed of attorneys with tax and real estate backgrounds and we have successfully implemented various strategies for numerous clients in the past. Chances are there are several ways to achieve your real estate and financial goals, so don’t hesitate to reach out if you have any questions. We’re always happy to chat more about your specific needs and questions at 408-472-4127 or by email at hello@keirealty.com.

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Moving Homes? Here’s What You Need to Know About Prop. 19 in California

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Proposition 19, which passed in the November election by a slim majority in California, will implement a number of key changes to how you can — or can’t — retain your property tax benefits after selling or transferring your home.

Major provisions in the legislation begin going into effect February 2021, but Prop. 19 won’t impact everyone buying a new home.

Here’s what you need to know:

If you’re 55 and older, lost your home to a natural disaster, or have a severe disability

Moving just got a little bit easier for you. 

Beginning on April 1, 2021, Prop. 19 will allow homeowners aged 55 and older, those who lost their homes to a wildfire or natural disaster, or those who have a severe disability to move anywhere in California and retain their existing property tax benefits up to three times, so long as that property is “purchased or newly constructed as that person’s principal residence within 2 years of the sale of the original primary residence,” according to the legislation.

For example, if you originally purchased your home for $400,000 and it is now worth $1.3 million, you may now retain your $400,000 tax base if you purchase or newly construct a home that is worth $1.3 million or under anywhere in the state of California.

If you fall under this category and your new home purchase is more expensive, Prop. 19 will also give you some leeway in tax savings by allowing you to blend the taxable value of your old home with the sale price of the new home. To calculate this new value, take the difference between the sale price of your original primary residence and the purchase price of the new home, and add it to the tax basis of the original primary residence. 

To use the example from earlier: If your original primary residence was first purchased for $400,000 and is now worth $1.3 million, but you want to move to a home that is worth $1.5 million, you will retain your $400,000 tax base for the first $1.3 million of the value, while the remaining $200,000 will be added to the original $400,000 resulting in a $600,000 property tax base.

Prior to the passage of Prop. 19, homeowners had one opportunity to retain their existing tax benefits if they moved to a home in the same county, or a specific list of 10 counties, that was equal or lesser in value than the home they just sold. If they moved to a different county, one outside the list of 10, or to a more expensive home, they would lose their existing tax base and end up paying more in property taxes.

 

If you’re a parent passing down your home to your children, or you’re a grandparent passing down to grandchildren whose parents have died

The level of concern you should have for Prop. 19 boils down to what your child decides to do with the home you’ve passed on to them.

If your child will be living in that home as their primary residence within one year of the transfer, then you don’t have to worry about too much. The transfer will not trigger a reassessment, so long as the difference between the assessed value and the current market value is not greater than $1 million. If the difference is greater than $1 million, the home will be partially reassessed — but not at market value.

If, however, your child does not plan on living in that home full-time as their primary residence (e.g., they want to keep it as a second home or rent it out), your child will not be able to retain your existing tax benefits. For all transfers taking place beginning February 16, 2021, the home will be reassessed at its market value and the property taxes will likely increase as a result.

This may come as a disappointment to children inheriting property, as previous legislation prior to the passage of Prop. 19 allowed children to maintain the tax base value for inherited property, regardless of how they used the property. But Prop. 19 will not be retroactive, so it will only apply to transfers taking place beginning February 16, 2021.

These same rules apply to grandparents who are passing down family homes to grandchildren if their parents have died.

Still confused?

No worries — you’re likely not the only one! Feel free to reach out to us to chat more about your specific needs and questions  in the contact form below.

 


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Find Your Home

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Finding your home starts with arming yourself with knowledge. As highly educated professionals local professionals, we’ve taken time to thoroughly research, detail, and explain the nuances of the different neighborhoods in our areas.

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Home Buying Process

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The first step in finding a home is to select the right neighborhood. Becoming a home owner has many legal and financial ramifications. It may not be prudent to choose an agent on “personal connection” or because an agent is “nice”. Just like lawyers and doctors, the best agents are equipped with specific knowledge of the area and understands the legal consequences of contract documents.

As an attorney who grew up in the area, Kevin understands and explains the repercussions and ramifications of all contract documents. From contingencies to liquidated damages, Kevin walks buyers through the nuances and meaning of all parts of the offer process. While no agent is right for everyone, Kevin believes that experience, expertise, education, and specialization all contribute to success.

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What You Should Know Before Buying A Home

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What should I know before buying a condo or townhome?

Purchasing a condo or townhouse typically means ownership in what is known as a common interest development (“CID”). When a buyer purchases a unit in a CID, the buyer is either purchasing a pro-rata (fancy word for proportionate) share of the common areas of a complex or the buyer has an interest in a homeowner’s association that owns the common area.
In either scenario, this usually means that the buyer will be required to make monthly payments, also known as regular assessments or homeowner’s association dues, to pay for maintenance of the common areas. But what happens if a complex or community suddenly needs to replace a damaged roof from an unexpected storm or update an aging fitness center? These types of unexpected expenses may call for special assessments. Special assessments are funds in addition to regular assessments that an association finds is necessary to address special or unexpected repairs or additions for a complex.
CID’s also may have special rules and regulations like architectural requirements, limitations on pets, and age restrictions (ie. senior housing).

What does buying a condo or townhome mean?

Part of the appeal of buying a condo or townhome is the ease of maintenance for upkeep of the home. The fact that an association maintains and cares for landscaping and exterior features means less hassle and worry for an owner. However, this convenience also means that an owner must follow certain rules, and violation of rules can lead to violation notices or possible fines from an association. As you can imagine, failure or improper disclosure of important information related to a homeowners association can lead to conflicts, and potentially litigation, between a seller and buyer. Thus it is important that a seller fully disclose all necessary documents related to ownership in a CID. In addition to regular disclosures that are legally required in residential transactions, California resale of a unit in a CID requires additional disclosures including:

1. Copies of all governing documents of the development:
2. A statement describing restrictions in governing documents limiting the occupancy, residency, or use on the basis of age;
3. A copy of the most recently distributed annual budget report;
4. A statement from the association regarding the associations current regular and special assessments and fees as well as any assessments or fees specific to a unit that has not been paid;
5. A statement of any notice previously sent to a seller related to any alleged violations of rules that have yet to be resolved;
6. Whether there is any current litigation between the builder of the complex and a homeowner’s association with a copy of any alleged defects;
7. Any settlement agreement between a builder of a complex and the homeowner’s association including a description of any defects the association believes to be present and when such defects will be replaced;
8. Any change in a homeowner’s associations current regular and special assessments and fees which have been approved that have yet to become due and payable;
9. Any provisions in governing documents that prohibit the rental or leasing of units including a description of the restriction and how it applies;
10. A copy of homeowner’s association board minutes conducted over the past 12 months if requested by a prospective buyer.
There are many benefits to owning a condo or townhome including ease of ownership, uniformity in design, and affordability. Some find a sense of comfort in knowing that they can rely and count on a group of other people to share in what may be increased costs due to unexpected events. However, this comfort also calls for increased diligence when either selling or purchasing a unit.

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Comprehensive Marketing

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Professional Photos

We start with professional photos. Our photographers have worked for national publications including Vanity Fair and the New York Times and it shows. The popularity of social media and online portals means 90% of homebuyers start their search process on the internet. This is why we make sure the photos displayed on the multiple listing service and online are of the highest caliber, drawing more traffic to your home.

Video of your home

https://youtu.be/SKqmS3YaB0w

If a picture is worth a thousand words, a video is worth a million. Our videos of homes and the surrounding area provides potential buyers with details of a home that is hard to replicate in photos. Our videos draw out and emphasize the unique characteristics that help with last minute decisions to submit a strong offer. Videos allow buyers to visit properties before or after viewing a property from the convenience of their home. They can see the property again at their convenience, and be confident when making that last minute offer.

3-D Tours

In conjunction with our photos and videos, we also provide an immersive 3 dimensional tour of your home. Buyers can take a step by step trip through the home without ever having to set foot in it. They are free to roam and explore the home for as little or as long as they want, all without having to contact an agent to arrange a showing.

Full Color Listing Brochure

Our full page color listing brochures provide buyers with critical information they look for when deciding to make an offer. The high quality photographs and information remind buyers why they visited properties to begin with, and make our properties stand out amongst piles of brochures after what can sometimes be numerous open house visits.

Custom Website

In today’s digital world, our team understands that buyers start their search process online. This is why we provide each property with a unique website. Our in depth online marketing and advertising drives traffic to this site where potential buyers can find further details about your home.

Google and Facebook Ads

To make sure our properties reach the most relevant audience, we harness the power of targeted advertising through Google and Facebook ads. We make sure your property is seen by the most likely demographic by location and age to purchase your home.

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Listing Preparation

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Our track record of home listing preparation, marketing, and proven negotiation skills means that our listed homes consistently sell for more. In apples to apples comparisons of listed homes, our past sales have consistently sold for higher prices in shorter days on market.