Home prices in California keep rising. Affordable housing is a political buzzword. And in November, fully one-third of all ballot measures, if passed, would tinker with state housing policies. Consider Proposition 5. Under California's current law, a property's taxable value can only increase by a maximum of two percent.
But market values generally rise by more than two percent each year. Median sale price in California has risen more than 60 percent in the past 10 years and is projected to rise an additional 8.6 percent by August 2019, according to the real estate data company Zillow. As a result, homeowners that move from one house to another usually end up paying more in property taxes, since their new property will be taxed based on the purchase price, which is likely more expensive than the taxable value of their current home.
However, some types of homeowners can lock in lower taxes by transferring their existing, lower taxable home value, to a new property – and under Prop. 5, more transactions would be eligible for the same arrangement.
How things work now
Today, homeowners over the age of 55, severely disabled homeowners and homeowners impacted by a natural disaster or contamination are all eligible to transfer the taxable value of their existing home to a new home. But the tax break is limited. Homeowners can only move the taxable value of their existing home once. The new property they buy must have a market value of equal or lesser value than their old home, it must be purchased within two years of the sale of their original home and, finally, it has to be located in the same county as their old home, or in a county that agrees to let them transfer their old taxable home value. The current provision can give homebuyers significant tax savings.
To illustrate, the Legislative Analyst’s Office used the example of a 55-year-old couple buying a new home. If the couple purchased their home 30 years ago for $110,000, their home’s taxable value now is $200,000, even though its market value might be significantly higher. They pay $2,200 in property taxes. So, if the couple sells their home for $600,000, so long as they buy a new home for less than or equal to $600,000, they are still eligible to pay taxes on their new home as if it was valued at $200,000. Two previous ballot measures, Propositions 60 and 90, currently allow Californians to transfer taxable property values from one house to another.
In aggregate, the exceptions reduce the assessed value of real estate that county assessors can tax.
In Riverside County, as a result of applications filed under Propositions 60 and 90 in 2017, the county assessor calculated that more than $150 million in taxable property values were reduced. But $150 million likely underestimates the total reduction as a result of the two measures each year, since homeowners that transfer their old property value under Prop. 60 or Prop. 90 are likely to remain in their new homes in subsequent years.
What Prop. 5 changes
Prop. 5 removes many of the restrictions under current law. Under Prop. 5, eligible homeowners would be able to transfer the tax-assessed value of their old home to a new one as many times as they like. They would be able to move anywhere in the state. They could buy a more expensive home and still enjoy tax savings. And if they chose to buy a cheaper home, their property taxes would decline relative to their current property taxes.
The Legislative Analyst’s Office used the same hypothetical 55-year-old couple, to explain the effect of Prop. 5. The hypothetical couple's home has an assessed value of $200,000, because the home's assessed value increase was capped at two percent annually. The couple then sells their home for the market value – in this case, $600,000.
If the couple were to buy a home for $700,000, under the current law, their taxes would be $7,700, since $700,000 is greater than the market value of their old home, and therefore would not be eligible to transfer their old assessed property value. But under Prop. 5, they would pay taxes as if their home had a $300,000 taxable value – $300,000 being the sum of the old home’s taxable value ($200,000) plus the difference in market values between their new home ($700,000) and their old home ($600,000).
Their yearly tax bill, accordingly, would creep up to $3,300, rather than all the way up to $7,700.
Alternatively, if the couple buys a new home for $450,000, under the current law, they would pay $2,200 in property taxes. Under Prop. 5, the taxable value of their home would fall to $150,000 – the product of the old home’s taxable value multiplied by the ratio of their new home’s market value ($450,000) and their old home’s market value ($600,000). In this scenario, their taxes would decline from $2,200 to $1,650.
Suppose a 55-year-old couple's current home has a taxable value of $200,000. If the couple sells their existing home for $600,000, and buys a new home for $700,000, under current law, their taxes would increase to $7,700.
But under Prop 5, the couple would instead pay $3,300, as if their home had a $300,000 taxable value, following this equation: Suppose a 55-year-old couple's current home has a taxable value of $200,000. If the couple sells their existing home for $600,000, and buys a new home for $700,000, under current law, their taxes would increase to $7,700.
But under Prop 5, the couple would instead pay $3,300, as if their home had a $300,000 taxable value, following this equation:
Old home's taxable value + [New home's market value - Old home's market value]
_________________________________________ New home's taxable value
$200,000 + [$700,000 - $600,000]
_________________________________________ $300,000
Alternatively, if the couple buys a new home for $450,000, under the current law, they would pay $2,200 in property taxes. Under Prop. 5, the taxable value of their home would fall to $150,000 – the product of the old home’s taxable value multiplied by the ratio of their new home’s market value ($450,000) and their old home’s market value ($600,000).
In this scenario, their taxes would decline from $2,200 to $1,650.
Suppose a 55-year-old couple sells their old home, which has a taxable value of $200,000, for $600,000. The couple then buys a new home for $450,000. Under current law, they would continue paying $2,200 in property taxes, as they did at their old home.
Under Prop 5, the taxable value of their home would fall to $150,000 and their taxes would decline to $1,650. The taxes follow this equation:
Old home's taxable value x [New home's market value / Old home's market value]
_________________________________________ New home's taxable value
$200,000 x [$450,000 / $600,000]
_________________________________________ $150,000
Why the Real Estate Industry supports Prop 5:
The measure is sponsored by the California Association of Realtors, which argues Prop. 5 will help allow seniors to move to new homes, freeing those properties for new buyers to fill. “Right now, seniors are, we feel and our members feel, trapped into their properties,” said Alex Creel of the California Association of Realtors. The problem, he said, is that seniors might want to buy a house that’s more expensive than the one they’re selling, perhaps because it’s in a city closer to relatives or healthcare facilities. A senior buying such a property wouldn’t be able to transfer their current taxable property value under current law.
Creel argues encouraging seniors to buy a new home opens up their old homes for younger families to buy. He would call the measure a success if the number of seniors staying in the same house declines and homebuilding increases following the passage of Prop. 5. The realtors also believe the LAO ballot analysis underestimates the ancillary benefits of increased home buying and homebuilding spurred by Prop. 5, as people hire, for instance, a painter to spruce up their home before they list it for sale or a title company as they complete a new purchase.
Additionally, realtors argue that $100 million to $1 billion in annual property tax reductions is relatively small in the context of the state’s $60 billion annual property tax haul. Jim Franklin, Government Affairs Director for the Palm Springs Regional Association of Realtors, said the bottom line is that realtors are trying to increase the number of homes on the market at a time when housing inventory has been low. Plus, Franklin thinks Prop. 5 will spur more home sales – which means increased property taxes when homeowners buy a new house under Prop. 5 and sell their old ones, resetting its taxable value to market value.
“Those taxes go way up,” Franklin said.