BLUE STATE BLUES: These Tax Laws Are Holding Back California’s Housing Market.

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“The state’s efforts to save homeowners money are now keeping many of them locked in their homes — and potential buyers locked out.”

Virginia Postrel:

In pricey areas, two enormous tax distortions will still encourage California homeowners to stick to the old homestead. One is the federal capital gains tax, which kicks in on any profit of $250,000 or more for an individual or $500,000 for a couple. In a state where tiny bungalows routinely go for well over $1 million, that’s not much of an exemption. “There are people in San Francisco who won’t sell until they die because of the capital gains,” says Kevane.

Even when they die, their houses may never hit the market. In the same 1986 election in which voters passed Prop 60, encouraging older owners to move, they passed a different measure with the opposite effect. Known as Prop 58, it created a new class of landed aristocrats: the descendants of people who bought their homes at low prices.

The law lets homes (and up to $1 million in other property) pass from parents to children without a step-up in assessed value. Another initiative, Prop 193, does the same for grandchildren when their parents are deceased. Together these exclusions all but guarantee that a significant portion of California homes will never go on sale. They can, however, be rented out at market prices.

Maybe Sacramento ought to try passing a law against unintended consequences.

h/t SG

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