Vote Yes on Prop 5!

Posted by Mike Michalski on Tuesday, September 25th, 2018.

A proposition developed by the California Association of Realtors, Prop 5, the Property Tax Fairness Initiative, will be on the ballot in California this November and deserves your support.

What is Prop 5 you say?  It's a measure that would build on and expand previous property tax initiatives, namely, Propositions 60 and 90, to allow for greater protection for seniors as well as the disabled and victims of natural disasters who would like to sell their home and move to a new home but retain their old home's property tax base so as not to incur a "moving penalty."

Current System

Under current law, Proposition 13 protects homeowners from rapidly increasing property taxes on their homes.  However, until 1986, seniors, often on fixed incomes, still faced the possibility of a massive property tax increase if they sold their home and bought a new one, since the tax assessment on the new home would be based off the purchase price.

In 1986, California voters approved Proposition 60 which stated that homeowners age 55 or older can transfer their Proposition 13 property tax base - only once - to a replacement home located in the same county, and only if the purchase price for the replacement home is equal or less than the sale price of the original residence. 

Two years later, the state's voters approved Proposition 90 which allowed this same property tax treatment even if the homeowner moved from one county to another provided the new county accepts transfers of property tax base assessments from other California counties.

So, while some of the biggest counties - San Diego, Orange and Los Angeles counties - have adopted a Proposition 90 ordinance, many others have not, with the result that older homeowners moving to a new home in those counties from a home in another county will likely incur higher property taxes even if the new home costs less than the one they just sold (the "moving penalty").

As a result, homeowners age 55 or older often find themselves unable to move for fear of incurring a substantially higher property tax bill if (1) the home they are moving to costs more than the one they just sold, (2) the county they wish to move to has not adopted a Proposition 90 ordinance, or (3) they've already used up their once-in-a-lifetime property tax base transfer.

Proposed Initiative

The Property Tax Fairness Initiative (Proposition 5) will allow homeowners age 55 or older to transfer their Prop 13 tax base to a new home of any price located anywhere within the state and they may do multiple such transfers over their lifetimes.  These protections are also extended to the disabled and to those who've lost their homes due to natural disasters.

Example I (Buying Up):  Say a couple (one of whom is at least age 55) sells their home for $400,000 that has an assessed value of $200,000, thanks to Prop 13.  If they then buy a $1 million home, their new home's assessed value will be the sum of the $600,000 difference in the market value of the two homes (the new home's purchase price minus the old home's sale price) plus the $200,000 Prop 13 value of the old home.  As a result, the couple will begin paying property taxes on their new home based on a Prop 13 value of $800,000 rather than the purchase price of $1 million.

Example II (Buying Down):  Let's suppose that same couple sells their $400,000 home and buys a $300,000 home.  Their old home's assessed value ($200,000, per the previous example) was only half of its market value of $400,000 at the time of sale.  So here, the new value for calculating the property tax on their newly purchased home would be that same ratio or half the purchase price of $300,000, which in this example means the starting tax base for the new property would be $150,000.

This new law will effectively allow seniors (and, as noted, certain other protected classes) to relocate without incurring a massive moving penalty.  They will no longer feel locked in place and, by selling their current homes and moving, they will free up those homes for families and other would-be buyers to purchase, which, in turn, will generate new tax revenues as those homes are reassessed (even as some tax revenue is lost on the new reduced tax base for the home purchased under Prop 5's protections).

Seems like a sensible solution to a persistent problem for seniors, often on fix incomes, who may want to downsize or move closer to their kids and grand kids but can't afford the higher property taxes.

We urge our readers to vote Yes on Proposition 5.


This entry was posted under Smell The Coffee, and Taxes.