Nov 6, 2018 is Election Day in California and two very important housing initiatives are on the ballot.
In this two-part blog post, we discuss Proposition 5, the Property Tax Fairness Initiative, and Proposition 10, the Local Rent Control Initiative. Both propositions attempt to ease our California housing crisis in their own way. First we will cover Proposition 5.
Vote YES on Proposition 5 – Property Tax Fairness Initiative
The Property Tax Fairness Initiative seeks to cure an unintended consequence of the 1978 Proposition 13 legislation. Currently, homeowners over the age of 55 can take a once in-a-lifetime property tax benefit by transferring their current property tax base to a new home purchase. However, restrictions tied to this benefit currently deem many seniors ineligible resulting in a “moving penalty” imposed on them if they decide to move. This moving penalty distorts the decision making process.
Establishing state-wide property tax protections under Prop 13
You may be quite familiar with Prop 13 already since it protects homeowners from onerous property tax increases annually. Before the passage of California Prop 13, property values could be reassessed annually. If a neighboring home sold, values of the surrounding homes could also be reassessed based on the higher property values.
Prop 13 – Provided California homeowners certainty in relation to their future property taxes by transferring the authority to set rates and allocate property tax revenues from local agencies to the state lawmakers. The following limits were placed on property tax assessments:
Property tax rates were capped at 1% on property value.
Annual assessment increases were limited to a maximum of 2% annually regardless of any higher market increases.
Reassessment of current market value was limited to years of property sale only.
Additional protection under Prop 60/90 for homeowners 55 years and over
Further protections are afforded to homeowners over 55 under Prop 60, in 1986 and Prop 90, in 1988:
Prop 60 – Allows homeowners 55 years and over of age to transfer their current property tax base to their replacement property for as long as the replacement home is of an equal or lesser value , located within the same county and purchased within two years of selling their original home. This
is a once in-a-lifetime benefit.
Prop 90 – Extends this transfer of property tax base to inter-county transfers
as long as the new county accepts the incoming transfers. Eleven counties currently allow for this including LA County.
These rules create a property tax portability that can empower seniors, often living on a fixed income, to make the decision to move without incurring the unfair “moving penalty” of higher property taxes.
The need to adjust for unintended consequences under Props 13/60/90
Unfortunately, many senior homeowners forego this once in-a-lifetime benefit of Prop 60/90 for various reasons:
The county that they want to move to does not accept inter-county transfers.
The area that they need to move to in order to be closer to family or a medical facility has higher property values, which make them ineligible under the “equal or lesser value” requirement under Prop 60.
They may have previously used Prop 60 and now, regardless of their new need to move, no benefit is available to them.
The goal of Prop 5 is to address these unintended consequences
and expand the property tax portability by:
Allowing the transfer of eligible homeowners’ current tax base to their replacement home located in any of California’s 58 counties.
Removing the current requirement under Prop 60 that the replacement property must be of equal or lesser value. This allows the homeowner to move to more expensive areas to be near their family. The homeowner is then allowed to transfer their current property tax base to the new property and then make an upward adjustment for the sales price difference of the new home over the sales price of their current home.
Allowing for unlimited transfers under this protection thus removing the need to strategize the timing of this benefit.
Expanding eligibility to not only homeowners 55 and older, but also to disabled homeowners (included previously under Prop 110) and victims of disasters.
Benefits to senior homeowners and to the California
real estate market in general
By allowing homeowners to take these property tax protections with them when they move, the decision making process becomes unencumbered by the current moving penalty. Eligible homeowners can now make the decision to move from their current home that no longer suits them, because of its size or location, without being penalized by higher property taxes. Without the portability of this property tax protection, many homeowners are discouraged from moving because of this moving penalty. By staying put, their home is prevented from coming to the market for young families who struggle to find available homes in this difficult low inventory market for their growing families.
In summary, increased property tax portability allows empty nesters to move to a smaller home or to a home closer to their family and grandkids while also creating opportunities for young families. By easing the financial burden to seniors wishing to move, all Californians benefit by allowing additional homes to the market for the next generation of growing families.
Overcoming opposing arguments
1. Loss of property tax revenue:
Opponents of Prop 5 point out that this initiative will result in the loss of property tax revenue. The loss is initially expected to $150 million annually, as estimated by the California Legislative Analyst’s Office (the “Office”). However, as the Office concedes, it is important to off set this loss by other increases in tax revenue in the form of both additional property taxes assessed on the homes sold to new families at market value and the increased transfer taxes earned on each sale. Further, it should be considered that if Prop 5 does not pass, these seniors may just not move which hurts the housing market and creates no increase in property taxes. It is unclear if the Office takes this into account when estimating the property tax revenue “loss.” Finally, this argument seems to ignore the cost of the current housing crisis at hand in California.
2. Pitting wealthy against less wealthy:
Opponents also portray proponents of Prop 5 as having selfish motives to benefit the rich. However, Prop 5 actually ensures that homeowners pay their fair share. As discussed above, while homeowners moving into a smaller home of equal or lesser value transfer their base without any increase to their property tax base, wealthier homeowners transferring to a home of a higher value incur adjustments related to the excess value of their new home over the value of their original home.
Help California’s housing market and protect senior homeowners by voting YES on Prop 5 this November.