Older Californians: Guide to Tax Breaks
In the late 1980s, California voters approved a pair of propositions that give homeowners older than 55 a property tax break when they sell their primary residence and buy a replacement one that costs the same or less. It was intended to help empty nesters downsize without facing a property tax increase.
A bill sponsored by the California Association of Realtors would have extended that break, with a modification, to seniors buying a more expensive home. The bill, by state Sen. Jim Beall, D-San Jose, passed the Senate Governance and Finance Committee 7-0, but failed to make it out of the Appropriations Committee on Thursday, leaving it dead for now. The association says it will reintroduce the measure in the Assembly.
In the meantime, seniors can still take advantage of their once-in-a-lifetime opportunity to use Proposition 60 or 90, which were designed to loosen the lock-in effect of 1978’s Proposition 13.
Under Prop. 13, property in California is generally reassessed at market value only when it is sold. The tax is 1 percent of assessed value statewide, plus local taxes.
In between changes of ownership, the assessed value can go up by an inflation rate of up to 2 percent per year. If the homeowner makes a major improvement, it’s added to the assessed value, but it does not trigger a reassessment of the entire property.
As a result, people who have owned a home for many years pay far less in property tax than they would if they purchased the same house today, or in some cases even a smaller one.
“Proposition 13 has a lock-in effect. That was the justification for Propositions 60 and 90,” said Lenny Goldberg, executive director of the California Tax Reform Association.
How they work
Under Prop. 60, homeowners who are older than 55 or permanently disabled can sell their primary residence and transfer its assessed value to a replacement home in the same county of equal or lesser value.
Prop. 90 lets them transfer their assessed value to a replacement home of equal or lesser value in a different county, but only if that county accepts incoming transfers. Only 10 counties do, including San Mateo, Alameda and Santa Clara.
There is some wiggle room: Seniors who sell their home before buying a replacement can spend up to 5 percent more on the new home if they buy it within a year, or up to 10 percent more if they buy within two years. But if they buy first and sell later, they cannot spend even $1 more on the new home.
For more rules, see http://bit.ly/1nVHYXS.
If married, only one spouse must be older than 55 to qualify. Once you have used this transfer, neither you nor your spouse can get it again, unless one of you becomes disabled, in which case you can transfer again because of the disability.
Last year, 4,402 California homeowners filed Prop. 60 claims and 2,207 filed Prop. 90 claims, according to the state Board of Equalization.
San Franciscans Tim Shea and his husband plan to take advantage of Prop. 60 this year. They have already purchased a single-family home for $1.2 million near Ocean Beach and now have their condo in Hayes Valley on the market for $1.2 million.
The couple wanted the independence of a single-family home and space for a home office, so Shea, an enrolled agent, could give up his leased office and semi-retire. Although their new home is bigger than their condo, “we downsized in neighborhood and architectural character,” Shea said.
They purchased the condo, which they had been renting, for $420,000 in 2011. Their assessed value is around $440,000 and their property tax is around $5,500.
If they can get at least $1.2 million for the condo, they can transfer their $440,000 assessed value to the new home. If they can’t, the new home would be assessed at $1.2 million and their taxes would more than double.
They considered selling first and buying later, to get the wiggle room. But demand for housing is so fierce — they paid $300,000 over asking for their new home — they wanted to make sure they could buy before they sold.
Their agent, Jane Poppelreiter of Paragon, believes they can get at least $1.2 million. “I’m 2 percent worried and 98 percent confident,” Shea said.
Under the Realtors’ proposal, they wouldn’t have to worry. It would amend Props. 60 and 90 so seniors could transfer their assessed value to a more expensive home, but the difference in market value between the old and new homes would be added to their value.
For example, if a senior sold a house for $1.1 million and purchased a replacement for $1.2 million, he could carry over his tax base, but it would increase by $100,000.
Beall had two companion bills: SCA9 would have put the measure on the November ballot (it would need two-thirds voter approval) and AB378 would have implemented it.
“A lot of seniors in my district are stuck in their big homes,” Beall said. “This gives them a little more flexibility to live in a smaller home” that might cost more.
Downsizing could cost more if a senior moves from an old home to a newer one, or from the suburban hills to a walkable, urban neighborhood, said Christopher Carlyle, a lobbyist with the Realtors association.
Getting more empty nesters to sell their big homes would “increase the supply of existing single-family homes available to young families, in effect making housing more affordable,” said the California Taxpayers Association, which supported the bill.
The Board of Equalization estimated that the bill would cut property tax revenue by $7 million a year statewide, but it only looked at revenue lost on the replacement home.
That’s only half the equation, proponents argue. When seniors sell their existing home, it generally gets reassessed at market value, resulting in a tax increase. If you count both transactions, it could produce a net increase in tax revenue.
In Alameda County, 157 homeowners took advantage of Prop. 60 in 2014-15, resulting in a net tax gain of $300,000 to the county, County Assessor Ron Thomsen said.
However, “that is assuming they would not have sold without the benefit” of Prop. 60.
The California Association of Counties opposed the measure, unless counties could choose whether or not to participate in the expansion, the way they can with Prop. 90, or the state reimbursed counties for revenue losses.
Santa Clara County Assessor Larry Stone opposed the measure, for two reasons. “No. 1, age 55 is not a senior citizen,” he said. “No. 2, we have had 16 amendments granting some additional property tax relief on top of Prop. 13. We have to stop giving away the tax base of this state.”
Goldberg’s association also opposed the bill. “The current system makes sense. It encourages people on fixed incomes who don’t want to incur more tax or debt to move,” into a less expensive home, he said. But expanding it to cover seniors buying more expensive homes “reverses the whole logic by giving people who have already gotten all the advantages of Prop. 13 an even bigger advantage competing in the market” against younger people who don’t enjoy the tax break.