California, the land of liberal regulations and taxation, continues to go down that path. Last year, the California senate proposed an income tax increase that, if enacted, will go into effect retroactively on January 1, 2020. While the proposed tax increase itself is a big deal, the fact that they are proposing to have it go into effect retroactively is a really big deal.
The tax is an extra 1% on income earned over $1 million; an extra 3% on income earned between $2 and $5 million; and an extra 3.5% on income earned over $5 million. California already has the highest taxes in the country, and this would make the top bracket a staggering 16.8%. (The current top is 13.3%, which it’s been since 2012.)
For those interested, here’s a link to the bill, which was amended in July. It hasn’t yet been voted on yet, so the outcome is unknown at this time.
According to the San Francisco Business Times, many wealthy people are already leaving California. (California has already recognized the mass exodus, and even prepped for it by proposing more tax laws that could follow people even after they move outside of the state. Yikes!)
Here in our little hometown of Reno, Nevada, it seems like everyone you meet who is new to the area is a transplant from California. Many who haven’t left California yet are waiting around to see how bad things get before they leave. If this precedent of a retroactive tax increase is set, the government would be channeling a pretty clear message: if you want to pay lower taxes by leaving California, it might already be too late.
It’s not only new taxation driving people out of the Golden State: astronomic rent prices and a move to remote work during COVID-19 are causing many Californians, especially those who live and work in Silicon Valley, to rethink their residence. After so many companies had to switch to remote work during COVID-19, many companies are continuing to allow remote work far beyond the predicted end of the pandemic — and some are even planning to switch to remote work permanently. Why rent an apartment in expensive California cities when the same breadwinners can work from anywhere and instead purchase a home where it is more affordable with less traffic? (These trends were recently covered in this Wall Street Journal article, which is behind a paywall.)
What happens when wealthy people leave a state to save on their taxes or to find a better cost of living? People sell their properties and tenants leave their pricy rentals, creating a less-than-ideal situation for California investment property owners. If you are among the many investors who own property in California (or in a different state with a similar situation) and are scrambling to sell your investment properties, don’t leave your hard-earned money on the table through a standard sale. If you don’t already know us, you can guess from this article that we are not a fan of over-taxation. We built our Hughes Private Capital 1031 Exchange option for just this reason. We saw so many people in the same situation: stuck with a rental property that was draining their resources and energy, with issues ranging from crazy taxes to crazy tenants. But when they looked into selling their property, they were hit with the massive numbers representing the capital gains taxes they would have to pay upon the sale. No one wants to sell after calculating all that, especially in places like California, where high taxes are a drain on your wealth. Using a 1031 Exchange when you sell your property avoids all of those taxes. If you’re interested in exactly how much you’ll save in taxes and how much you’ll be able to earn as a 1031 Exchange investor with us, schedule a call or meeting with us and we’ll calculate it out for you based on your specific investment property.