** Important information for all homeowners over 55 contemplating the sale of your principal residence**
California’s current property tax law allows homeowners over 55 a once in a lifetime transfer of the assessed value of a principal residence to a replacement of equal or lesser value and realize a property tax savings. PROPOSITION 5, on the statewide ballot this November, will change the formulas and anyone contemplating the sale of your existing residence and purchasing a replacement in the State should carefully read and consider the following information. This discussion is broken into two parts. The first is an explanation of the current law and what changes under Prop 5. The second part is a discussion of timing considerations.
Part 1 – Explanation of current law and proposed changes under Prop 5
Under the current law, the assessed value of your principal residence can be transferred only once (with an exception for subsequent disability) to a replacement anywhere within the County, providing that one of the owners is over 55, the sale of the original and the purchase of the replacement are completed within a two year period and the transaction meets the “value test”. Transfer to another County, known as Prop 90, requires that the gaining county has adopted an ordinance accepting base year transfers from any other county in the state. The value test means that either:
If the original residence is sold first, the fair market value (FMV) of the replacement must be less than or equal to 105% of the fair market value of the original residence if purchased within 12 months, and 110% if the replacement is purchased between 12-24 months.
If the replacement is purchased first, the fair market value of the replacement must be equal to or less than the fair market value of the original.
PROPOSITION 5, if adopted by the voters on November 6th makes the following changes to the base year transfer provisions:
The new law becomes effective on January 1st, 2019. Qualifying purchases of replacement residences after that date will be subject to the new rules.
It allows transfers statewide, removing the Prop 90 requirement that a County adopt an ordinance accepting transfers.
It removes the once in a lifetime restriction, allowing unlimited transfers.
The age requirement and two year window for selling the original and acquiring the replacement remain unchanged.
It removes the value test and replaces it with the following adjustments to all transferred base year values
If the fair market value of the replacement is greater than the fair market value of the original (buying up), the assessed value of the replacement is calculated as:
As an example, the original residence has a current assessed value of $250,000 and a market value of $750,000. The replacement has a market value of $800,000. The new base year value of the replacement residence will be enrolled at $300,000. This is the original transferred base year value of $250,000 plus the difference in market value of $50,000. (Replacement FMV of $800,000 - $750,000 FMV of the original)
If the fair market value of the replacement is less than the fair market value of the original (buying down) then the assessed value of the replacement is calculated as:
As an example, the original residence has a current assessed value of $250,000 and a market value of $750,000. The replacement has a market value of $600,000. The new base year value of the replacement residence will be enrolled at $200,000. This is the original residence ratio of $250,000 to $750,000 (.33) applied to the replacement residence FMV of $600,000.
Part Two – Timing Considerations
Currently, El Dorado County accepts base year transfers from other counties under Prop 90, however, that ordinance expires after November 7th. The election on November 6th will determine if PROP 5 passes. If passed, the new rules become effective on January 1, 2019. Anyone over 55 who is contemplating or in the process of selling an original residence and acquiring a replacement anywhere in the state should take the following into consideration:
If the replacement fair market value is greater than the original residence fair market value (buying up), it might be beneficial to wait until after November 6th before finalizing the purchase. If the ballot measure passes, then the benefits of delaying until after January 1st should be considered for the potential of property tax savings as a result of the new base year transfer rules. If the ballot measure fails, there is no downside and the replacement will still be assessed at its current fair market value, normally the purchase price.
If the fair market value of the replacement is less than the fair market value of the original (buying down), it is still beneficial to wait until after the November 6th election. If the measure passes, then transfers after January 1st will be assessed under the new rules and buying down will reduce your property taxes by applying the ratio to the lower fair market value of the replacement. If the ballot measure fails, transfers within the counties will not be affected.
If the measure passes, Prop 90 becomes irrelevant and transfers can be made statewide after January 1, 2019. If the measure fails, Prop 90 remains in effect and an implementing county ordinance is still required.
NOTE – If you are contemplating a Prop 90 transfer to El Dorado County and decide to wait and see how the election turns out and Prop 5 does not pass, then you will only have one day, November 7th, to enter into an escrow or contract in order to meet the qualification to transfer a base year value to a replacement in El Dorado County prior to the expiration of the ordinance. If you are in escrow anytime before Nov 7, but don't close until after Jan 1, you would not miss out on Prop 90 if the measure fails, and if Prop 5 passes, you will be eligible for the new rules..
I hope this information is helpful and as always, please do not hesitate to call me at 530.621.5757 or email me at firstname.lastname@example.org if you have any questions.