Taxes. Everyone’s favorite subject.
A new ballot initiative is coming to California voters November 6, 2018. Initiative 17-0013(titled: CHANGES REQUIREMENTS FOR CERTAIN PROPERTY OWNERS TO TRANSFER THEIR PROPERTY TAX BASE TO REPLACEMENT PROPERTY. INITIATIVE CONSTITUTIONAL AMENDMENT AND STATUTE.) has been approved to be voted on by the People of California. This initiative is shaping up to have a large impact on cities, counties, and schools, but the reason it’s even on the ballot is because it’s been determined that it should have a net positive effect on housing inventory for sale in California.
In California, we have a very large demographic of Baby Boomers and older who are aging in houses that they’ve owned for many years. These homeowners have benefited from Proposition 13 which effectively capped the rate of assessed home value increases at 2% per year, and with property tax calculated at just over 1% of the assessed value, those homeowners living the longest in their homes have enjoyed a huge benefit of very low taxes relative to housing costs. Since home values tend to average a 6% increase per year and property taxes only increase a maximum of 2% per year, you can see that taxes do not keep up proportionately.
The impetus behind the new initiative is a solution put forth by the California Association of Realtors to try and solve the chronic inventory shortage we've been experiencing. Studies have shown that people over the age of 55 who have lived in their homes for several years with a very low assessed value are hesitant to move because they may end up paying a lot more a year in property taxes. The thought of a considerable increase in annual property tax can effectively put the brakes on the idea of selling a home even if the home is too big, has too many stairs, or someone just wants to be closer to children and grandchildren. The annual tax increase can be cost prohibitive to those on a fixed income.
As it stands today, those 55 and older may move one time within the same county in which they currently reside or to a reciprocal county (Proposition 90) if the home they are purchasing is the same price or of a lesser value than what they are selling. Today there are 11 counties which will reciprocate: Alameda, El Dorado, Los Angeles, Orange, Riverside, San Bernardino, San Diego, San Mateo, Santa Clara, Tuolumne, and Ventura. (Note: El Dorado County has voted to no longer accept transfers as of November 7, 2018).
The newly proposed initiative however, aims to make this a universal transfer to any county in California, allowing transfer of the tax basis where the home purchased is a higher price than the home sold (it also allows it to be the same price or a lesser value which I'm not covering in this blogpost), while also removing the one-time limit thus, making it possible for homeowners over the age of 55 to use it an unlimited number of times. The impact will be very far-reaching because it would apply to any homeowner over the age of 55 purchasing another property.
As an example, let’s say that a homeowner, Betty (age 65), wants to move from her home in Roseville, California (Placer County) to be near her children in Southern California where prices are much higher. Her current house can be sold for $600,000 and a small condo can be purchased in Irvine (Orange County) for $700,000. Today, her assessed value is only $75,000 and her annual property tax is only $750. If she were to sell her house and buy a new house, her annual property tax would jump to $7,000/year because the assessed value is based on the purchase price. The tax jump could prevent Betty from seriously considering selling and that would mean that her house (and many like hers) won’t go on the market to be sold to young and growing families.
Now let’s imagine that the initiative passes and Betty is able to transfer her assessed value to her new property. There’s a proposed formula that calculates Betty’s new assessed value. First, we calculate the difference between the purchased home and the home that’s sold ($700,000 - $600,000 = $100,000). Then add the difference to the sold home’s assessed value ($100,000 + $75,000 = $175,000) to get the new value to calculate property taxes on. In this scenario, Betty’s property taxes only increase to approximately $1,750/year which could make it workable.
I’ve had conversations with folks here in the Sacramento area who are stuck. Two recent examples come to mind: One couple wanted to move from Carmichael to Folsom to be near grandchildren and another wanted to move from a home that required more maintenance to a home in Sun City with low maintenance. In both cases, the houses they want to purchase have a higher price albeit minimal (usually under $100,000 and many times just $25,000) but under current situation, they won't move because they don’t want to give up their low property tax.
The benefits to this initiative passing would likely free up housing for young and growing families, it would potentially help older homeowners to make moves that otherwise benefit them, and it would save homeowners money on property taxes. The initiative, if approved, would go into effect January 1, 2019.
Of all the benefits, there’s a considerable economic impact estimated to be in the millions that would impact counties, cities, schools, and special districts that rely on property tax for revenue. California law provides a minimum of funding for schools so that may shift more to the State budget if the local counties can’t provide the minimum funding required. It's true that more housing inventory would be freed up if the proposal passes, but at what cost?
I'm not writing an opinion piece, but an informational piece so you know what's coming up in November. There's more than one side to the story. You, as voters, must decide. Understand that Proposition 13 benefitted all home owners by putting limits on property tax increases, but it also cut revenue to the counties and that brought about Mello-Roos (another tax!) What do you think? I'm curious to know! Take the Survey!