The Pitfalls of Re-Financing California Real Estate

Re-financing Real Property has increased lately due to low interest rates.

Sometimes a borrower will need to add a third party in order to qualify for the loan.

This could be parent or other third party (e.g. brother, uncle, or in-law).

If the co-signor is not an exempt spouse or child, the borrower risks a partial property tax increase.

It is well advised to consult an attorney to confirm whether the situation possess a risk of tax re-assessment.

Under the right circumstances, the attorney can help the borrower avoid any tax increase, even if the co-signor is a non-exempt individual, such as a parent or grand parent.

For more information, please contact the Law Offices of Hanlen J. Chang.

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California Statewide Rent Control Exemptions

AB 1482, California’s statewide rent control (limiting annual rent increases and imposing just cause eviction restrictions) has several property owner category exemptions, for most of pertinent are:

1. Single-family owner-occupied residences, including a residence in which the owner-occupant rents or leases no more than two units or bedrooms, including, but not limited to, an accessory dwelling unit or a junior accessory dwelling unit.

2. A duplex in which the owner occupied one of the units as the owner’s principal place of residence at the beginning of the tenancy, so long as the owner continues in occupancy.

3)  Housing that has been issued a certificate of occupancy within the previous 15 years.

4.  Residential real property that is alienable separate from the title to any other dwelling unit, provided that both of the following apply:

(A) The owner is not any of the following:

(i) A real estate investment trust, as defined in Section 856 of the Internal Revenue Code.

(ii) A corporation.

(iii) A limited liability company in which at least one member is a corporation.

The most common exemption are residential homes and condominiums under category 4 (assuming the property does not otherwise qualify for municipal and city specific rent control.)

One type of real property that may not be exempt are “quasi-condo” structures under tenancy in common arrangements.

LLCs are also exempt, as long as no corporation has a membership interest.

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Multiple Properties – Tax Benefit of LLC (Pre-Death Planning Opportunity Only)

Under California Proposition 58, the Parent to Child Exclusion for transfer of the pre-exisiting Proposition 13 tax base is unlimited for one residential property, plus one million ($1,000,000.00) per parent spouse for non-residential property (maximum two million [$2,000,000.00] if two parents).

For an owner of an investment property or properties exceeding two million, tax planning for purposes of preserving the pre-exisiting Proposition 13 tax base can be accomplished through the use of a business entity, e.g. LLC or L.P.

The tax re-assessment rules for a business entity holding real property differs in that it depends on 1) a change of control of more than 50%; or 2) more than 50% of the original co-owners change.

Importantly, any Business Entity planning and structuring regarding the investment property is only possibly before the owner dies.

As time goes on there will be more LLCs created as more real properties will be worth one million or more and more tax assessment will catch up to that threshold.

For a consultation regarding this topic please contact the Law Offices of Hanlen J. Chang.

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For Sale by Owner – Alternate Hourly or Flat Fee Service

For Sale by Owner (FSBO) is suitable for situations where the seller has already found a buyer. This alternative hourly rate or flat fee service can save costs compared to hiring a realtor who will be compensated on commission.

A Lawyer-Broker can assist with preparing the real estate documents and arranging for escrow. This service requires an average of 11-24 hours.

Common situations include:

  • Tenant seeking to buyout Landlord;
  • Buyout of a Joint Tenant;
  • An Owner who wants to sell without a realtor.

A Realtor service is more suitable when there is no a pre-determined buyer and marketing is required.

If you believe your situation may benefit from a For Sale by Owner alternative hourly or flat fee service, please contact the Law Offices of Hanlen J. Chang for more information.

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San Francisco Bay Area Housing Supply to Remain Low For Foreseeable Future

If you were already discouraged by low housing inventory and supply in the San Francisco Bay Area, there is little reason to hope that it will improve for the foreseeable future.

Some factors include:

  • The two percent (2%) per annum Proposition 13 tax cap that encourages long term holding of California Real Estate;
  • New Federal Tax Law limiting mortgage deduction to $750,000, but grandfathering in pre-existing home owners $1,000,000 mortgage deduction;
  • New Federal Tax Law limiting State and Municipal real property tax deduction to $10,000 per year;
  • Rising Interest Rates making mortgage financing more expensive.

Other factors influencing selling v. holding include suitability as rental property and estate planning desire to pass on the real property “in kind” to your children who may inherit the pre-existing lower tax base.

In summation, why sell your home, if buying another home in the same area will significantly increase your financing costs and taxes.

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