If You’re Over 55, It May Pay to Move

Nine long years after the euphoric passage of Proposition 13, a legislative chink in the armor of that landmark initiative offers a tax break and a chance of home ownership to young families.

Newly enacted Assembly Bill 60, authored by Assemblyman Dave Elder (D-Long Beach), implements Proposition 60, which was approved overwhelmingly (almost 78%) by state voters last Nov. 4.

The bill is an exception to provisions of Proposition 13, which cut property taxes in half after its June 6, 1978, endorsement by voters seeking tax relief.

At the same time, the Jarvis-Gann Property Tax Initiative all but eliminated the revenue base for local governments. Their recourse was to impose user fees and charges, mainly affecting the housing and construction industries.

AB 60 helps on two fronts:

It allows persons over 55 to avoid an increase in property tax liability if and when they sell the old homestead and move to another residence more suitable to their life styles.

The bill also would make available older--usually--single-family dwellings to young families seeking that first home in an established neighborhood, if they qualify for a loan.

Signed into law July 22 by Gov. George Deukmejian and made effective immediately, the bill allows homeowners over the age of 55 to transfer “the base year value” of their original property to a replacement home of equal or lesser value, but it must be in the same county and that move must take place within two years of the sale of the original property.

The newly purchased house may be newly constructed or an existing house and must be used as a principal residence.

Attorney Robert M. Shafton explained that the base-year value of the original property means the fair market value as determined for either the 1975 lien date or for the date on which a purchase or change of ownership occurs, or for which new construction is completed.

As homeowners know, Proposition 13 limits property tax rates to 1% of the assessed value of property. The value of that property is either its 1975 assessed value or its market value when purchased, or newly built or when a change of ownership takes place after the 1975 assessment.

Proposition 13 also limits the increase in assessed value due to inflation to 2% annually, but allows any increase in assessed value that reflects home improvements.

Many families living in old, established areas are reluctant to sell their dwellings and lose the very comfortable and low tax rate, based on the tenets of Proposition 13.

For instance, if the John Smith family had purchased a $100,000 home in 1975--an expensive price for that period--and had made some improvements, probably they would be paying $1,000 (1%) in property taxes even if the home’s fair market value today were $300,000.

If the Smiths sell the house to the Browns, the Browns’ taxes would jump to about $3,000. Proposition 13 mandates that reassessment take place on newly sold property based upon the fair market value at the time of sale.

Then, if the Smiths--having sold their longtime residence for the handsome $300,000 figure--decide to buy an equally priced house or nice condominium, they would have to pay $3,000 in taxes on their new home, $2,000 more than the tax on the originalhome.

Until now, that factor discouraged and stymied many families wishing to move. They just stayed put in a house that had become too large for Mom and Dad--an empty nest--but they may have made allowable improvements and stayed on.

If you’ve been in the market lately for a carpenter, painter or tile man, you know the frustration of not being able to pin down such a craftsman to even come and give you an estimate.

Under AB 60, the Smiths may “carry over” their $1,000 tax liability to the new condominium or house by transferring the assessed value of the original home to the new residence. But the price of their replacement house cannot exceed the market value of the newly reassessed house, as in the $300,000 example above. If they pay any more than that price, AB 60 won’t do them any good.

Realtors believe that many older families will not hesitate now to move to more suitable homes for their life styles, freeing up older and larger homes for younger buyers, relying on the adage that when one family moves, so does another.

But before those 55-year-olds and their families pack up to sell and move, remember that you can’t stray too far. AB won’t let you leave the county and take your tax transfer with you.