Dreaming of Downsizing? An Upside Property Tax Consideration

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.

Valuation

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.

To help illustrate these rules, here are a few scenarios:

• Jeff and Helen, both in their 60s, have lived in their Santa Clara home for 30 years and are now divorcing. They will be selling the family home and downsizing to two smaller less valuable properties in the same county. Unfortunately, only one of them can receive the Prop 60 property tax benefit so they must decide between themselves who will get the benefit.
• Keith is 60 and his wife Monica is 52. Keith passes away, and several months later, Monica wishes to sell her home and transfer the base year value to another home. The property tax rules state that the claimant or claimant’s spouse who resides with the claimant must be at least 55 at the time of the sale of the original property. Since Keith is deceased at the time of the sale of the original property, Monica would not meet the age requirement and qualify to use the benefit.
• Sally inherited her mother’s home in San Francisco several years ago and made the home her primary residence. She filed and received the California Proposition 583 parent-child exclusion and maintained her mother’s basis for property tax purposes. Now age 55, Sally wants to sell the property and downsize to a home in San Mateo County (a county that accepts intercounty base value property transfers) but is worried about an increase in property taxes. As long as Sally meets the other requirements (timing, value, residency, timely filed claim), she can transfer her mother’s property base year value to her new home. It does not matter how Sally acquired her original property.
• Amanda is 60 and her home is held in a trust of which she is the sole present beneficiary. Amanda may file a claim to transfer the base year value to a replacement dwelling, which will be purchased and held in the trust, as long as she files as the present beneficial owner of the trust and not as trustee of the trust.
• Sam, age 56, sold his primary residence in Palo Alto and moved to a high-rise condo on Wilshire Boulevard in Los Angeles thinking he wanted to enjoy a more urban experience in his later years. He quickly learned that traffic, congestion, and noise was not his thing and decided to move to Ojai in Ventura County. Lucky for Sam, nothing in the Prop 90 rules requires that the first home purchased be the replacement dwelling. Sam can own an interim residence. As long as Sam had not filed a claim to transfer the base value to the LA condo and as long as the Ojai residence meets the value and timing requirements, he can claim Prop 90 eligibility on the Ojai property.

Conclusion

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.