Expanding the "Portability" of Homeowners Property Tax Basi
Expanding the “Portability” of Homeowners’ Property Tax Basis May Help Those Seeking to Move Up the “Housing Ladder”December 8, 2006Taxation Committee
Housing Opportunity Committee
Legislative CommitteeThe following is for study only and has NOT been approved by the Taxation Committee, Housing Opportunity Committee, Legislative or Executive Committees orthe Board of Directors.Issue:
Should homeowners’ ability to transfer their property tax basis be increased in an attempt to increase the housing available to those seeking to move up the “housing ladder”?Action:
Optional.Options:
1. Sponsor legislation that allows homeowners, when they sell their home, to retain their property tax basis and transfer it to their next home withthe basis adjusted by the difference between the existing property tax basis of their former home and the purchase price of their new home.2. Sponsor legislation that amends existing law to eliminate the option provided tocounties which allows them to not participate in a program that allows seniors to transfer their existing property tax basis to a home purchased in another county so long as their new home is of equal or lesser value and/or legislation that amends existing law to eliminate the restriction currently placed on seniors transferring their existing property tax basis to only purchasing a home of equal or lesser value.3. Appoint a task force to study and make recommendations on the circumstances under which a homeowner should be allowed to transfer their property tax basis to their next home.4. Other.5. Do nothing.Status/Summary:
One approach to addressing the housing affordability problem would be to increase the ability of homeowners to move up and down the “housing ladder.” Interestingly, while Proposition 13 helps homeowners remain in their homes, it also has the affect of “trapping” them in their homes. This is because each time a homeowner seeks to move up the housing ladder, they have to start over with regard to the protections provided by Proposition 13. In other words, they give up the tax basis on their current home and acquire a higher basis (based on purchase price) of the replacement home. This problem is particularly acute for seniors on limited incomes and resulted in Proposition 60 being placed on the ballot and approved by the electorate in 1986. Unfortunately, Proposition 60 was limited to seniors moving within the same county and few counties are participating in the extension of the Proposition 60 program authorized by Proposition 90 which allows seniors to move across county lines while retaining their property tax basis so long as the county to which they are moving has agreed to participate in the Proposition 60 program. Another problem with Proposition 60 is that the replacement home must be of equal or lesser value than the original home. For many of the same reasons for allowing seniors to retain their property tax basis, consideration could also be given to eliminating theProposition 60 program’s limitation to seniors so that any homeowner would be able to retain their property tax basis. The loss of revenues to government could be mitigated by adjusting the property tax basis upwards by the difference between the property tax basis of the former home and the basis established by the purchase price of the new home.DiscussionThere has been substantial discussion – which will not be replicated here – devoted to how the dream of owning a home is increasingly moving beyond the means of the typical California family. Suffice it to say that with a median price of slightly below $600,000 for a home in California, it is a stretch for middle-class families – and simply beyond the reach of families of lower economic means – to purchase a home.Regrettably, no on-going solution to this problem has presented itself. Attempts have focused on fixing the ineffective housing element system or at “throwing money at the problem” (witness the recent housing bond measures). As a result, policy-makers still find themselves casting about for a solution to the affordable housing problem.One possible step in the direction of improving affordability would be to increase the mobility with which homeowners can move up and down the “housing ladder.” This would address the current logjam that prevents homeowners seeking to move up the “housing ladder” from doing so. This would also likely increase the housing stock available at any point in time on each “rung” of the ladder.Generally speaking, homeowners seek to move up the “housing ladder” from less expensive to more expensive homes. This generally mirrors how families grow (from no kids to some kids) as well as incomes (as individuals continue in their career, their incomes increase). If mobility is restricted, it becomes more difficult for homeowners to move up the housing ladder and, as a result, the supply of more expensive homes is restricted. Obviously, as sellers move up tomore expensive homes, less expensive homes become available for lower income wage earners.Proposition 13 (which placed a cap on property taxes, as well as a limit on the permitted annual growth) was advanced as a way to help people – and, particularly, seniors – keep their homes. Prior to the passage of Proposition 13, homeowners had control over the amount of their monthly mortgage payment; however, they had virtually no control over increases in their annual property tax bill. As a result, the proponents of Proposition 13 argued that homeowners were at risk of losing their homes due to runaway property taxes.Interestingly, while Proposition 13 helps homeowners remain in their homes, it also has the affect of “trapping” them in their homes. This is due to the manner in which Proposition 13 operates. Homes are reassessed for property tax purposes upon purchase and the amount of theproperty tax is based on the purchase price of the home. As a result, there is a disincentive for homeowners to move from one home to another: if they move, their property tax will be based on the purchase price of their new home. In other words, each time a homeowner seeks to move up the housing ladder, they have to start over with regard to the protections provided by Proposition 13.The dynamic becomes clearer if one imagines two identical homes side-by-side. Both homes were originally sold for $100,000 in 1981 and one home is occupied by the original owner. The other home, however, was just purchased by a new owner for $600,000. Ignoring the 2%per year allowed for annual property tax growth, the former owner will have an annual property tax bill of 1 percent of $100,000 or $1,000. The new homeowner, however, will pay 1 percent of $600,000 or $6,000. When spread over a 12 month period, that $6,000 equates to $500 a month. That is fairly daunting amount to a homeowner who is already faced with having to pay a higher monthly mortgage payment.This problem is particularly acute for seniors who usually have limited incomes. Their ability to absorb an increased property tax bill is constrained by their limited retirement income. In fact, due to their limited income, senior homeowners may want todecrease their housing costs by moving to a smaller home. As a result, Proposition 60 was placed on the ballot and approved by the electorate in 1986. Proposition 60 allows senior homeowners to transfer the base-yearvalue of their original home to their replacement home so long as the replacement home is of equal or lesser value and is located within the same county.For example, a senior who purchased their home in 1981 for $100,000 who twenty-five years later sells their home for $600,000 and purchases a new home for $500,000 (which by virtue of being equal to or less than $600,000 qualifies the senior to participate in the Proposition 60 program) would be taxed on the basis of their former $100,000 home (for an annual property tax of approximately $1,000) instead of on the basis of their new $500,000 home (which would normally result in an annual property tax bill of approximately $5,000).Unfortunately, Proposition 60 was limited to seniors moving within the same county. As a result, Proposition 90 was placed on the 1988 ballot and approved by the voters. Proposition 90 allows seniors to participate in the Proposition 60 program when moving to anothercounty if the county in the which the replacement home is located has adopted an ordinance to participate in the Proposition 60 program. Regrettably, less than a half-dozen counties are currently participating in the Proposition 90 program. Consequently, the ability of seniors to move from one county to another county is severely limited and, thus, so to is their mobility with regard to moving down the housing ladder. Should consideration be givento eliminating the county option to participate in the Proposition 90 program?(In both the case of Proposition 60 and Proposition 90, an amendment to Proposition 13 was required because each of the propositions sought to change the manner inwhich the property tax basis was determined for seniors. In each case, the Legislature placed the proposition on the ballot. However, rather than placing the entire change in the state constitution, the language of the amendment to Proposition 13 authorized the Legislature to enact the statutory changes needed to implement the change described in each proposition.)Another alternative would be to reform the Proposition 60 program to allow seniors to purchase homes with a higher property tax basis than their existing home. Depending on how long a senior has lived in their original home, their next home – while more expensive than their original home – may, in fact, be smallerand, thus, less costly to maintain than their original home. Arguably, seniors should not be required to purchase a home of lower value in order to qualify for transferring their original property tax basis.In fact, for many of the same reasons for allowing seniors to transfer their property tax basis, consideration could also be given to eliminating the Proposition 60 program’s limitation to seniors so that any homeowner would be able to retain their property tax basis. This change could be attempted so that homeowners can retain their property tax basis only if they move within the same county or, in the alternative, if they move anywhere in the state. Similarly, if the programis proposed for expansion to all homeowners, consideration could also be given to eliminating the limitation that the next home be equal to or of lesser value than the former home.Clearly, there would be a property tax revenue loss to the state and local governments if the Proposition 60 program were amended to allow seniors to move anywhere in the state while retaining their property tax basis. As a result, there will be strong opposition from, particularly, local governments to such an amendment. That opposition will be that much more strenuous if the program is made to apply to all homeowners and not just senior homeowners.However, the impact of the decrease in revenues can be mitigated byadjusting the property tax basis upwards by the difference between the assessed value of their former home and the purchase price of the new home. For example, suppose that a homeowner who purchased a home twenty-five years ago for $100,000 sells that home for $400,000 and purchases a new home for $600,000. The property tax basis could be adjusted upwards by adding the original assessed value of their home to the difference between the sales price of that home and the purchase price of the new home. The original tax basis of $100,000 plus the $200,000 difference ($600,000 minus $400,000) would result in a new property tax basis of $300,000.The homeowner’s property taxes would beapproximately $3,000 per year as opposed to the approximately $1,000 per year their property taxes would be if they were allowed to transfer their original tax basis of $100,000 to their new $600,000 home. While the state and local governments would not receive the $6,000 to which they would be entitled if the homeowner were not allowed to keep their original property tax basis, they would receive $2,000 more than the $1,000 they would receive if the homeowner were allowed to keep theiroriginal property tax basis.
