Today I have answers to questions from readers on homeowners insurance in wildfire areas and capital gains tax on the sale of a home.
Q: Rocky Fort asks: “Can an insurance company jack up the rates of customers seeking insurance in a fire zone?”
A: Companies regulated by the California Department of Insurance can only charge a premium based on their currently approved rate filing. “So unless the company has changed its rates and had them approved before the policyholder’s renewal comes up, the insurer cannot willy-nilly ‘jack up’ rates,” department spokesman Michael Soller said in an email.
Those regulated insurers “must first submit a rate change filing to the department. That filing is reviewed to ensure the proposed rates are not excessive, inadequate, or unfairly discriminatory, and if those three basic prongs are satisfied, the insurer cannot use the proposed rates until after the filing is approved,” he added.
Some homeowners in wildfire-prone areas are seeing premium increases as a result of rate-increase filings the department has approved over the past couple of years, reflecting wildfire losses from 2017 and 2018.
“Outside of a rate change, premiums could increase for several possible reasons, like increase in coverage limit, changes to the insured risk (i.e. the home) and recently filed claims,” Soller added.
Surplus lines companies, which are not regulated by the state and include carriers like Lloyd’s of London, can change their premiums without department approval.
Q: Mike Gnecco is trying to help a neighbor in the East Bay figure out what her capital gains tax might be if she sold her home. “She and her husband bought their home in 1984 for $270,000. They were listed as joint tenants on the deed. In 2009, they transferred the home to their revocable trust. In 2011, the husband died and the wife inherited per the provisions of the trust. She still lives in the home. The house was appraised for $615,000 at the husband’s death. The market value is about $1 million today. Upon selling the house, I know she would get a $250,000 exemption from capital gains and could deduct selling expenses and substantial improvements since 2011, but what is the cost basis for house?
Is it the appraised value of $615,000 in 2011 or is it half the 1984 value when it was purchased plus half the appraised value upon the death of her husband?”
A: When you sell a home, cost basis is the number you subtract from your sales proceeds to determine your capital gain.
If the home was considered “community property” in 2009 when it was transferred to the trust, then the cost basis would be “stepped up” to the value at the husband’s death, or $615,000, says Scott Haislet, a certified public accountant and tax lawyer in Lafayette.
“If the trust declaration stated that the home was community property when it was formed, that would be a valid legal expression that the couple intended it to be community property,” he said.
If the property was considered the husband’s “separate property” when it went into the trust, his death in 2011 would also trigger a basis adjustment to $615,000.
If the property was considered the wife’s “separate property” when it was transferred to the trust, then the husband’s death in 2011 would trigger NO basis adjustment. The basis would be the purchase price plus any improvements through date of sale, Haislet said.
If the property was held as tenants in common inside the trust, then the husband’s share would be stepped up to its value on the date of his death. The wife’s share would not be stepped up. If they both owned equal shares, his half would be stepped up to half of $615,000 (or $307,500) plus half of any improvements made since his death. Her basis would be half of the original purchase price plus half of any improvements made from the date of purchase until the date of sale, said Steve Hartnett, director of education with the American Academy of Estate Planning Attorneys.
“If the trust declaration is silent (as to the form of ownership), then you will have to go on facts and circumstances” to determine whether the home is community property, Haislet said. “If the wife can demonstrate that the couple was broke when they got married, and got no inheritances before they purchased the home, then it follows that community funds and earnings paid for the property, thus it would be community property. However, other circumstances surrounding the purchase might result in separate property of one spouse.”
The foregoing generally applies to community property states — Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin, as well as Puerto Rico. In other states, different rules apply.
Different rules also apply in California when spouses own property as joint tenants outside of a revocable trust. However, even if this couple owned the home as joint tenants before it went into the revocable trust, in California it could not be held in joint tenancy inside the trust, Hartnett said.
Kathleen Pender is a San Francisco Chronicle columnist. Email: firstname.lastname@example.org Twitter: @kathpender