Real Estate Matters

Homeowners over 55 are often reticent to downsize, lest they incur severe property-tax penalties. Several changes in state law in the last few years have eased that burden.

Proposition 13: As a result of the passage in 1978 of Proposition 13, all California property taxes are now assessed at 1 percent of the purchase price. Each year thereafter, tax increases are limited to no more than 2 percent per year. When property is sold it is then reassessed at market value, but the rate remains at 1 percent of the purchase price and the new owner is then protected by the 2 percent cap on annual increases.

Prior to Proposition 13,the average property tax rate in California was 3 percent of assessed value and there was no limit on annual increases. In those days, if a house on your block sold for much more than you paid for your home you shuddered in fear of your next property-tax bill. Chances were, your new taxes would be based on what your new neighbor was willing to pay for his home.

Things got so bad in the late 1970s that people were actually losing their homes because of uncontrolled tax increases. This was especially hurtful to seniors and people on fixed incomes. In addition, the newcomer felt resentment from his or her new neighbors. Needless to say, this was not a comfortable beginning for the new neighbor!

Proposition 60: Many people over the age of 55, who may now be empty nesters or have more square footage than they need, do not want to sell and move because they believe their property taxes will take on a new basis. This is not always true if one chooses a county where property tax can be moved from your existing residence to the new one.

If either spouse is over age 55, when the old home is sold, Proposition 60 allows replacement of a primary residence with a new home of equal or lesser value within the same county and transfer of the Proposition 13 assessed valuation from the old home to the new property. This is allowed once in your lifetime; a spouse who has done it before “taints” both spouses.

Proposition 90: The California Association of Realtors (CAR) initiated Proposition 90, which became effective in November 1988. There are eight counties that have adopted this proposition. CAR is working diligently to increase the number of counties on the list.

What is Proposition 90? It is the same as Proposition 60 with additional counties that have adopted it. At present they are as follows: the counties of Alameda, El Dorado, Los Angeles, Orange, Santa Clara, San Diego, San Mateo and Ventura.

Exceptions to the 2 percent cap rule: There are exceptions to the 2 percent cap on annual property tax increases, including:

A. If the property is sold to a new owner.

B. If additions or major remodeling enhances the value, then the tax assessor can increase your property-tax basis. Presuming that you got a building permit, the building department will notify the assessor of the addition and the assessor will increase your tax assessment accordingly. The increase will show up in future tax bills, prorated from the date of completion. There may be one supplemental tax bill depending on when the date of completion falls within the tax year.

Good news follows for homeowners 55 years of age and older who wish to move. How to go about making the process work without increasing their existing property taxes is quite easy if the rules are followed.

Propositions 60 and 90 apply if you “trade down,” i.e., the new home costs less than the sales price of the old home.

If you sell the old home first and then buy the new home within 365 days of the sale of your old home, you may purchase a home that is up to 5 percent more expensive than the old home sold for.

If you buy the new home more than one year after the sale of your old home, but less than two years after the sale, you may purchase a home that is up to 10 percent more expensive than the old home sold for.

So there is relief for those who want to stay in California after selling the family home if they follow the guidelines.

Nancy MacLeod has run an independent boutique real estate firm, Homes2Buy.com, since 1999. She was named Palo Alto Realtor of the Year in 2011. She can be reached at nancy@homes2buy.com or 650-888-5276.

Nancy MacLeod has run an independent boutique real estate firm, Homes2Buy.com, since 1999. She was named Palo Alto Realtor of the Year in 2011. She can be reached at nancy@homes2buy.com or 650-888-5276.