Proposition 5: The Property Tax Transfer Initiative

property taxProposition 5 will be on the November 6, 2018 statewide ballot and could provide you property tax relief if you are a qualified California homeowner.

If passed, Proposition 5 will extend Proposition 13 property tax benefits.

First, a brief history of property tax propositions:

  • Proposition 13 passed in 1978 making base property tax 1%, with 2% maximum annual increases.
  • Proposition 60 authorized seniors a one-time move of the property tax to another property. In the same county if the new home’s purchase price is equal to or less than the sold dwelling.
  • Proposition 90 allowed counties to accept Proposition 60 property tax basis from a home sold in a different county to be applied to those that accept low property tax transfers. 10 counties have opted into accepting these transfers.

What is being considered today:

  • If passed, Proposition 5 will make it so that those 55 and older will be able to move their Proposition 13 tax benefit to a home of any value, anywhere in California any number of times. Plus, Proposition 5 adds two addition categories of persons: those that lose their home to natural disasters and the permanently disabled homeowners of any age.

If you are thinking of moving call me at 949-616-2988 to discuss your particular circumstance.

Note: this article is not tax or legal advice.

For further details about Proposition 5 and how it may affect you read the information below.

——————————————————————————————————————————-

The California Association of Realtors sponsored the initiative and referred to it as the “People’s Initiative to Protect Proposition 13 Savings.” The California Attorney General describes Proposition 5 as “Changes Requirements for Certain Property Owners to Transfer their Property Tax Base to Replacement Property. Initiative Constitutional Amendment and Statute.”

Starting January 1, 2019 three segments of the population would be enabled to benefit from the passage of Proposition 5, they include: 1) homeowners over 55 with their primary residence in California, 2) homeowners that have had their primary residence substantially damaged or destroyed by a disaster, as declared by the Governor and 3) any homeowners that are a severely and permanently disabled person.

To fully understand the significance of the 2018 Proposition 5 you will need to have a basic understanding of the Howard Jarvis’s lauded Proposition 13, passed in 1978, along with Proposition 60, passed in 1986, and Proposition 90, passed in 1988.

Proposition 13 made it state law that property tax base rates are 1% of the full cash value, usually the purchase price, (minus the $7,000 homeowners’ exemption) and that the property tax may only increase a maximum of 2% per year.  Proposition 13 defined “full cash value” as the county assessor’s valuation of real property as shown on the 1975-76 tax bill under “full cash value” or the appraised value of real property when purchased, newly constructed, or a change in ownership that occurred after the 1975 assessment.

Proposition 60 allows seniors a one-time opportunity to use the Proposition 13 benefit of having their lower property tax basis transferred to a newly purchased replacement dwelling. Seniors are defined as any person over the age of 55 years and includes a married couple one member of which is over the age of 55 years. The current law in place is that the replacement dwelling must be of equal or lesser value than the dwelling to be sold. Proposition 60 only applies to intra-county primary residence replacements and was enhanced with the passage of Proposition 90.

In 1988, Proposition 90 was passed and enhances the Proposition 60 benefits by allowing counties to opt into allowing Proposition 60 transfers of property tax basis from other counties. Only 10 counties in California have chosen to accept this inter-county property tax bases, they include: Alameda, El Dorado, Los Angeles, Orange, Riverside, San Bernardino, San Diego, San Mateo, Santa Clara and Ventura counties.

Proposition 5 would enhance Propositions 60 and 90 by allowing homeowners 55 years of age or older to transfer their Proposition 13 tax basis to a home of any price (proportionally), located anywhere in the state, any number of times. Let me provide a hypothetical example to explain by what I meant by proportionally. Say you purchased your home 21 years ago for $200,000, with a property tax basis of $2,000 and with compounding your property tax basis is now $3,000 and your home is now worth $900,000 and you want to purchase a home for $1,200,000. You sell the less expensive home and purchase the home that costs $300,000 more, your property tax basis from the original home would move with you for the first $900,000 in value and your property tax basic 1% levy would only increase by the difference in the full cash value. Your new property tax would be the $3,000 moved basis plus an additional $3,000 for the property tax on the increased value. Therefore, your property tax base would be $6,000 instead of $12,000 (see Figure 1).

Figure 1, Buy Up Example

Figure 1, Buy Up Example

If you want to buy a less expensive home, your property taxes will be reduced proportionally equal to the original home. Any replacement property of equal or lesser value purchased or newly constructed by a person eligible to transfer the base year value of his or her original property, the base year value of the replacement property will be calculated by dividing the base year value of the original property by the full cash value of the original property, and multiplying the result by the full cash value of the replacement property. If in the same scenario as above, you sold your $900,000 property and purchased a $450,000 home the new property tax would be half of the new sale price or $1,500 per year (see Figure 2). The buy down is a little harder to follow so let me provide a second example. If your existing home sells for $600,000 and your property tax is $2,000 and you purchase a home for $400,000 your new property tax basis would be 1% of one-third of $400,000 or about $1,333.33 per year (see Figure 3).

Figure 2, Buy Down Example 1

Figure 2, Buy Down Example 1

Figure 3, Buy Down Example 2

Figure 2, Buy Down Example 2

The benefits to those that have suffered from having their primary residence substantially damaged or destroyed by a disaster, as declared by the governor, applies to replacement properties that are comparable to the home that was damaged or destroyed without regard to the age of the owner(s). This is explicitly for a replacement property that is located intra-county. Proposition 5 has language indicating that the state Legislature may authorize each county board of supervisors to adopt, after consultation with affected local agencies within the county, an ordinance allowing the transfer of the base year value of property that is located within another county in the State.

The third category of persons that may benefit from the passage of Proposition 5 include any severely and permanently disabled person, who resides in a property that is eligible for the homeowners’ exemption. The property tax base year transfer is also applied to replacement dwellings that are purchased or newly constructed on or after June 6, 1990. The benefit would be in place regardless of the number of prior transfers, the value of the replacement home or whether the replacement dwelling is located within the same county. There are other details, but this gives you a general overview of the three classes of persons that may choose to benefit from the passage of Proposition 5.

The California Association of Realtors believes that if Proposition 5 is approved by California’s voters it would make moving between counties once again affordable for California’s retirees, help victims of officially recognized natural disasters and provide relief to the severely disabled.  These property tax benefits would result in the freeing up of home inventory and encouraging home ownership. If you are considering moving contact me to discuss your unique real estate needs, (949) 616-2988.

John Paul Ledesma, GRI | Broker Associate | HomeSmart Evergreen Realty| DRE 01810644

www.MissionViejoREDispatch.com

Note: this is not tax or legal advice.

©2018 John Paul Ledesma

Comments

  1. George Heer says

    Vey informative, Thank You!

  2. JP Ledesma (former Mayor of Mission Viejo) is one of the most knowledgeable professionals I would trust regarding Prop 5. The key take away is found in the last paragraph; ” The California Association of Realtors believes that if Proposition 5 is approved by California’s voters it would make moving between counties once again affordable for California’s retirees, help victims of officially recognized natural disasters and provide relief to the severely disabled.”
    If we as citizens can’t help seniors, disaster victims and severely disables…we need to reflect on where are our priorities in this State.

  3. Mike Langgle says

    Well written. Very informative.

  4. This is incredibly informative to California homeowners!

  5. Ashley Bran says

    After reading this article I have a better understanding then I had before about Proposition 5. So much so that I had to share this article. This part was very helpful, “If you want to buy a less expensive home, your property taxes will be reduced proportionally equal to the original home. Any replacement property of equal or lesser value purchased or newly constructed by a person eligible to transfer the base year value of his or her original property, the base year value of the replacement property will be calculated by dividing the base year value of the original property by the full cash value of the original property, and multiplying the result by the full cash value of the replacement property.” That was very informative. Thank you for sharing your knowledge on this.

  6. Kevin Johnson says

    John Paul Ledesma really shed a detailed light on the Property Tax Transfer Proposition. The info graphics on buying a property and what the base rate would be and how it all goes together was very informative. It’s really great that Proposition 5 would enhance Propositions 60 and 90 by allowing homeowners 55 years of age or older to transfer their Proposition 13 tax basis to a home of any price, located anywhere in the state, any number of times. I’m sure that will be a relief to may.

  7. Being an elementary school teacher, I haven’t had much occasion to dig into the nuances and complexities of the various tax codes, but fortunately, John Paul Ledesma wrote his article in such a way that even a “layperson” like me could understand it. Thank you, JP!

  8. I found Mr. Ledesma article more than interesting. He has done an excellent job of using layman terms and makes it easy to understand the importance of this proposition for anyone that is now 55 or will be in the future.

Leave a Reply to George Heer Cancel reply

*