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November 11, 2019
Thoughts of fewer traffic jams, less congestion, reduced home square footage, and lower housing prices may run through people’s minds when considering a move. Yet, for those who own their homes and have enjoyed the benefits of California Proposition 131 for many years, concern over dramatic increases in property taxes may significantly influence a decision to downsize. While in some circumstances, an increase in property taxes may not be a factor, there are two California propositions that may help some homeowners maintain their current property tax basis (herein referred to as base year value) after purchasing a new home.
If certain requirements (timing, value, residency, timely filed claim) are met, California Proposition 60 (Prop 60) allows either (1) a homeowner or the homeowner’s spouse who is at least 55 years of age or (2) a homeowner who is severely and permanently disabled to sell their primary residence and one time transfer the base year value of that property to a replacement residence of equal or lesser value. However, the home must be purchased or newly constructed within two years of sale within the same county.
Additionally, California Proposition 90 (Prop 90) allows transfers of base year property value from one county to another county in California (intercounty) if the county a person is moving to accepts the intercounty transfer. As of November 7, 2018, only 10 out of 58 California counties have an ordinance allowing for the intercounty base year value transfer.2 Only the county in which the replacement residence is located must have an ordinance that accepts intercounty transfers. It does not matter in what county in California the original property is located.
After both the sale and the new purchase have been completed, an application must be filed with the county assessor where the replacement property is located within three years of the date the replacement dwelling is purchased or the construction of the replacement dwelling is completed. A claim that is filed after the three-year filing period may receive the benefits commencing with the lien date of the assessment year in which the claim is filed but retroactive benefits from the date of transfer are not available.
Homeowners should pay special attention to the rules regarding disallowance of the transfer of the base year value when determining whether a new property is of equal or lesser value than the original property. For example, if the second property is purchased at less than fair market value (fire sale or intrafamily transaction), the assessor can revalue the property to fair market value. If the new value exceeds the value of the original property, the assessor can deny the transfer of the property’s base year value.
If the purchase of the replacement property is completed before the sale of the original property, then, “equal or lesser value” means that the full cash value of the replacement property cannot exceed 100% of the full cash value of the original property. If there is a downturn in the housing market and the sale of the original property is completed at a lower than originally expected price, the “equal or lesser value” condition may not be met and the assessor will deny the transfer of the property’s base year value.
However, if the replacement property is purchased or constructed during the first year after the sale of the original property, then “equal or lesser value” means that the full cash value of the replacement property cannot exceed 105% of the full cash value of the original property. If the replacement property is purchased or constructed during the second year after the sale of the original property, then “equal or lesser value” means that the full cash value of the replacement property cannot exceed 110% of the full cash value of the original property.
To obtain the benefits of these propositions, homeowners must pay close attention to the rules to ensure that all of the requirements are met.
If you or your spouse are over 55 and considering a move, it is wise to be aware of potential property tax savings and to seek good advice ahead of time. If you would like to learn more about property tax reassessments and applicable exclusions, please contact your tax professional or your Cerity Partners advisor.
Footnote:
1. Proposition 13 limits yearly increases in California property values to an annual inflation factor of no more than 2% unless there is a change in ownership.
2. California counties that allow intercounty base value transfers: Alameda, Los Angeles, Orange, Riverside, San Bernardino, San Diego, San Mateo, Santa Clara, Tuolumne, and Ventura. Since these counties are subject to change, we recommend you contact the county to which you wish to move to verify eligibility.
3. Proposition 58 states that a transfer of real property between parents and children may be excluded from property tax reassessment.
Cerity Partners LLC (“Cerity Partners”) is a registered investment adviser with oices in California, Colorado, Florida, Illinois, Ohio, Michigan, New York, Massachusetts, and Texas. Registration of an Investment Advisor does not imply any level of skill or training. This commentary is limited to general information, and should not be construed as personal tax, legal, or investment advice. There is no guarantee that the views and opinions expressed in this piece will come to pass. The information is deemed reliable as of the date of this commentary, but is not guaranteed, and subject to change without notice. It should not be considered as an oer to sell or a solicitation of an oer to buy any security.
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