One of the biggest advantages of owning a home in California is Proposition 13. This limits how much your property taxes can go up each year. Many long-time homeowners are paying property taxes based on an assessed value that is often well below the current market value of their home. Giving up this tax advantage can make it tough to move in retirement.
How to transfer California property tax from the old home to new.
“I’m over 55 and have owned my home, in Southern California, for decades. I’m looking to move to another home for my retirement. Will I be able to transfer my property tax base from my old home to my new home?”
The short answer is, as it almost always is, “it depends.” Here is some additional information to help you figure out if you will be able to transfer your low base to a new home, in California.
California homeowners 55 and older can get a one-time opportunity to sell their primary residence and transfer the property tax assessment to a new home under Proposition 60. The caveat here is the market value of the new house generally must be lower or equal to the home being sold. For married couples, only one spouse must be 55 or older.
This regulation was designed to help longtime homeowners, in California, who wanted to downsize in retirement and avoid having to give up their lower property tax assessments. I work with many clients who live in homes that are worth well north of 10 times what they paid for it. With sky-high real estate values in much of California, the tax savings here could be huge. For can be the difference between staying in your home or being forced to move.
Under the aforementioned Proposition 13, homes are only reassessed for property taxes when a change in ownership occurs or there is new construction. If neither of those actions occurred, the assessed tax base can only go up by an inflation rate not to exceed two percent, per year. On a side note, homeowners can also get a temporary tax reduction when their property values decrease. Real estate does go down in value here in California, as much as people like to claim it doesn’t.
With real estate values near record highs in much of California, most homeowners would face large property tax increases if they were to buy their homes again today. They would likely even see tax increases if they were to downsize to a cheaper home.
There is a little added cushion for those who are buying their new homes, after selling their current homes, and who wish to transfer the tax base. If the new home was purchased within one year of selling the former home, the new home must be 105%, or less, than the value of the former home. If the new home was purchased between one and two years after selling the former home, the new home must be less than 110% of the former home’s sale price. Be aware of these deadlines when shopping for your dream home in retirement.
There is a lot of confusion and misinformation about this tax break. This is something people can do once in their lifetime. Therefore not many of your friends are likely to have gone through this. Also, the requirement to stay in the same county also deters some potential homeowners from benefiting from Proposition 60.
According to the Los Angeles County Office of the Assessor website, a claim must be filed within three years of purchasing or completing the new construction of the replacement property. If a claim is filed after the three-year period, relief will be granted beginning with the calendar year in which the claim was filed.
If this is something that could potentially benefit you, apply to the Los Angeles County Office of the Assessor for a “Claim of Base Year Value Transfer.” Keep in mind that just because your old home sold for $2.5 million dollars and your new home was $2.45 million, that doesn’t mean you will automatically have your application approved. The assessor can challenge whether the sales price equals the market value.
If you sell your old home and throw in furniture, or other items, your value may be challenged. This can extend to things that are often included in a home sale like washers, dryers or above-ground spas. If your new home’s value exceeds the old home’s price, by even one cent, you will lose out completely on the benefits of Proposition 60. Make a note in your sales contract of the value being assigned to the personal property that’s being included with the sale of the home.
I would love to hear from anyone who has taken advantage of transferring their lower tax base. Or if you have been turned down attempting to use Prop 60 or 90. Properly using these laws could be the difference between a secure retirement in California or struggling to get by. Or even just being stuck in a home where you can’t get up or down the stairs.
Guidance with our transferring property taxes is part of our financial planning for California Retirees here at DRM Wealth Management. If you would like to see if it would be a good fit to be one of our clients, please reach out.
DAVID RAE, CFP®, AIF® is a Los Angeles Certified Financial Planner with DRM Wealth Management. A regular contributor to Advocate Magazine, Forbes.com, Investopedia not to mention numerous TV appearances. He helps friends of the LGBT Community across the USA get on track for their financial goals. For more information visit his website at www.davidraefp.com
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