By Caroline Abkar | Windermere Homes & Estates | October 2018
The California Association of REALTORS® submitted the ballot initiative for Proposition 5 stating that almost 75% of homeowners 55 and older haven’t moved since 2000 in fear of the moving penalty they cannot afford. With elections right around the corner, there is so much information out there, much of which is unfortunately incomplete or plain biased. You may think I am partial as a REALTOR®. Truth is, I am a big proponent of making informed decisions in all aspects of life so let’s take a deep dive into Proposition 5 as well as the main arguments in favor and against this initiative so that you feel equipped and confident when voting.
In order to illustrate the impact of Proposition 5, I will use a real life example (clients’ name changed to protect privacy).
What is Proposition 5?
Proposition 5 wants to allow homeowners age 55+ or severely disabled to transfer their property tax assessments, with a possible adjustment, from their prior home to their new home, no matter
(a) the new home’s market value;
(b) the new home’s location in the state; or
(c) the buyer’s number of moves.
Let’s take an important step back in history to understand what came before and ultimately led up to Proposition 5.
In 1978, voters approved Proposition 13 requiring properties be taxed at no more than 1 percent of their full cash value. It also limits the annual increase in assessed value to the inflation rate or 2 percent, whichever was less. What this means, is that homeowners who have owned their homes for many years are paying very little in property taxes compared to what they would pay if they sold their home and bought a new home today.
Jimmy bought a home in Bay Park in 1996 when he was 40 years old for $200,000. His base property tax was $2,000 the first year (1% of $200,000). Every year thereafter, the assessed value would go up by somewhere between 1.5-2% of the previous year’s value, and by 2018, his assessed value is $300,000 and his base tax payment is now $3,000 this year. (For the sake of simplicity, I am using 1% but in reality, the rate is slightly higher depending on which city one lives in, due to voter approved bonds to support schools, parks and other services. The actual property tax rate across the County varies from 1.02% – 1.19%).
Why did Jimmy only pay 1% as base property tax when he first bought his home and why did it go up by max 2% every year thereafter? It’s thanks to Proposition 13.
In 1986, voters approved Proposition 60, allowing homeowners age 55+ to transfer the property tax basis of their present home to a new home, assuming the new home was of equal or lesser value, located within the same county, and purchased within two years of selling the original home. In 1988, Proposition 90 was passed, allowing the replacement home to be anywhere in the participating counties including San Diego (currently, there are 11 participating counties in California with El Dorado County rescinding in November 2018).
Jimmy is now 62 years of age and his children have moved out. He finds the stairs in his two story property impractical and would love to move closer to his grandchildren. His home’s current market value is $750,000. He would love to move to San Jose. Unfortunately, San Jose is not a Prop 90 participating county so he wouldn’t be able to take his property tax basis with him. Given that a suitable home for him in that market is around $900,000 and he is now on a fixed income, he can’t afford to pay over $9,000 in base property taxes a year, which is 3 times as much as he pays now (this is later referred to as the “Moving Penalty”).
Jimmy figures he needs to find a new home as close to San Jose as possible so he can leverage Prop 90. He starts looking in Santa Clara and finds a potential property close to $800,000. Jimmy realizes he is unable to transfer his tax basis because the new home would be worth more than his current home. He needs to find a new home $750,000 or less. He’s unable to find a single family home in that price point so he decides to stay put in Bay Park.
As stated earlier, Proposition 5 wants to amend Proposition 13 to allow homeowners age 55+ or severely disabled to transfer their tax assessments.
The below illustrates the major differences between the current situation and Proposition 5:
An important note is that the tax basis would actually get adjusted if the new home’s value is higher or lower. Let’s come back to Jimmy’s example. If Proposition 5 is passed and Jimmy bought the home in San Jose for $900,000, he would be able to transfer his property tax basis using the following formula:
UPWARD ADJUSTMENT: (assessed value of their prior home) + (the new home’s market value) – (the prior home’s market value)
which in our example translates into (300,000) + (900,000 – 750,000) = $450,000.
So instead of a tax basis of $900,000, Jimmy would pay property taxes on the adjusted basis which is $450,000 if he found a new home at $900,000. He would be saving at least $4,500/year in property taxes.
If on the other hand he found a less expensive home to move into, e.g. $700,000, the tax basis would be adjusted downward with this formula:
DOWNWARD ADJUSTMENT: (assessed value of their prior home) × [(the new home’s market value) ÷ (the prior home’s market value)]
I.e. (300,000) x (700,000/750000) = $280,000.
So instead of a tax basis of $700,000, Jimmy would pay property taxes on the adjusted basis of $280,000. This may give Jimmy an incentive to find a less expensive property in an otherwise pricey market.
It’s time to take a look at the arguments in support of Proposition 5, and the ones against it. The table below provides a quick summary:
Official Arguments Supporting Proposition 5
In addition to the California Association of REALTORS®, supporters include the California Chamber of Commerce and the Howard Jarvis Taxpayers Association.
The official arguments in favor of Proposition 5 which were submitted in the state voter information guide are as the following:
Official Arguments Opposing Proposition 5
The measure is opposed by the California Democratic Party, the California Teachers Association, the Southern California Association of Nonprofit Housing, and other housing and labor advocacy groups.
The official arguments opposing Proposition 5 which were submitted in the state voter information guide are the following:
Those in favor of Prop. 5 state that an economic review of Prop. 5 conducted by two of the top economists in the state concluded that allowing seniors, the severely disabled, and disaster victims to move would likely increase tax revenues and provide more funds for vital public services, since the old homes they sell will generate more tax revenue once sold to new buyers.
Those opposing Prop. 5 claim that real estate interests behind Prop. 5 are trying to scare seniors with lies, and that current law already allows seniors and severely disabled taxpayers to keep a property tax break when they move. In their opinion, Prop. 5 is a new tax break for the highest incomes who keep buying bigger, more expensive homes after 55.
Food For Thought
If you are still unsure on how your vote could impact you, your loved ones, the economy as a whole, you could ask yourself some important questions:
- Would most homeowners 55+ purchase a new home which is more expensive than what they currently reside in? If so, would it be by much more?
- Do homeowners 55+ live in homes which could be freed up for others? What about the new homes they will occupy, who would otherwise have bought those homes?
- How likely are homeowners 55+ to move multiple times to keep transferring their tax basis as many times as they would like?
- If less taxes are paid on more expensive homes , what would those taxes have otherwise funded? By the same token, if homes currently occupied by homeowners 55+ who pay little in property tax are freed up to buyers who will pay the full re-assessed value, how much in property tax could be gained?
- Would Prop 5 give a big tax break to wealthy Californians? If a wealthy homeowner 55+ decided to sell their home and purchase an even more expensive one, and have their tax basis readjusted, they would pay more in base property tax but certainly not as much as they would pay without Prop 5. If the same home is purchased by someone younger than 55 under Prop 5, then full taxes would have to be paid. How do you feel about that?
- Is it possible for homeowners 55+ to find new homes price at an equal or lesser value?
- How will real estate pricing be affected, if more homes are freed up for first time homeowners, but demand from seniors increases as well for their move-up/move-down homes?
- How does this affect you if you are not a current homeowner but will be in the future?
- How does this affect you if you are a current homeowner?
I hope this ultimately helps with your decision when voting time comes. This is no easy decision, and below are some additional resources if you need.
As far as Media is concerned, proponents of Proposition 5 include The Orange County Register, The San Diego Union-Tribune while opponents include Los Angeles Times, San Francisco Chronicle, and The Mercury News, to name a few.
About the author: Caroline Abkar is a San Diego Real Estate professional who is absolutely passionate about her job and the community. You can contact her anytime at 619-808-4804 or firstname.lastname@example.org