Transfer of Property Tax Base to New Residence

Earlier posts have discussed Proposition 13, The People’s Initiative to Limit Property Taxation, which was passed by California voters in 1978.  One of the unintended consequences of this measure was to discourage people from selling their residences as their family circumstances changed.  As children left their family homes and started their own new households, parents remained in homes larger than they wished.  However, due to the property tax disincentive which occurred many were reluctant to sell their current homes with low assessed values to purchase smaller homes which would be assessed at higher amounts.

In 1986 California voters passed Proposition 60 which permits people over 55 years of age to sell one home and buy another of equal or lesser value within the same county and transfer their original Proposition 13 tax basis with them.  The time limit for affecting this tax transfer is two years, and depending on the timing of the transfer, the value of the replacement home can be as much as 110% of the home being sold.  This property tax transfer is a one-time benefit.

In 1988 California voters passed Proposition 90 which extends the Proposition 60 property tax transfer benefits to replacement residences in other counties, providing these counties choose to participate.  As of February, 2010 the following eight counties allow the transfer of property tax base:

Alameda              Los Angeles        San Diego            Santa Clara

El Dorado            Orange                 San Mateo          Ventura

On the surface the application of these Propositions seems straightforward, but in the course of our real estate experience we have been reminded that for all tax questions it is essential that tax advice be obtained from a Certified Public Accountant (CPA) or an attorney familiar with tax laws.

An example which came up recently for us involved a divorcing couple who were in agreement over which spouse would take the property tax base to a new residence.  The home that they owned together and were selling was held in a family trust, while the replacement home was purchased in one of the spouse’s individual names, i.e. the manner in which title was held was not consistent for both properties.  Unfortunately the specific questions surrounding the transfer of the tax basis did not arise until the closing when the tax assessor forms were accessed for completion.   The tax assessor’s office staff was uncertain about the applicability of the law and the divorce attorney was also not clear about the issue.  In the end the client sought the advice of a real estate attorney whose opinion after considerable research and based on this client’s situation was that the transfer of the property tax base was possible.

Our advice if you are planning to transfer your property tax base to another home is to always seek tax advice from a qualified professional before entering into any real estate listing or purchase contract.  While real estate practitioners are familiar with the basics of these laws, they are not qualified to give tax advice.  Here is a link which provides some basic preliminary information:


January 18, 2011

In an earlier blog post (DATE) we discussed how property taxes are established in California based on Proposition 13, The People’s Initiative to Limit Property Taxation, which was passed by California voters in 1978.

As the State of California continues to experience challenging economic times the subject of Proposition 13 and perceived inequities in property taxation have become the subject of political discourse.  As noted in the previous post, a property is reassessed at the time of sale based on the cash or market value at the time of purchase.  Assessments in subsequent years may not rise more than 2%.

Here is an actual example based on two similar homes in the Vintage Oaks subdivision in Menlo Park.  Each home built in 1997 sold originally for around $1,000,000, and property taxes were approximately $10,000 per year (1% of 1,000,000).  One homeowner has lived in his home since he acquired it, and his property taxes for 2010-2011 are around $14,500.   The other property has been sold several times in the past 14 years.  The current owner purchased the home about 2 years ago, and the current tax bill is $32,400, more than twice the neighbor’s tax assessment!

Locally property values have risen dramatically over the years.  In the example above, the property purchased two years ago at around $3,000,000 represents a 200% increase in value.  Proposition 13’s limitation on the amount by which property tax assessments can be increased benefits long-term owners by protecting them from paying taxes on “unrealized gains”, and allowing them certainty that their property tax obligation will increase no faster than 2% per year.  This has been vital to older home owners on fixed incomes and lower income individuals whose incomes may not rise as quickly as the values of their homes.

Conversely, an argument can be made that newer and younger homeowners are bearing a disproportionate share of property taxes, and that the provisions of Proposition 13 are “unfair”.  Those who perceive the inequities of Proposition 13 also often refer to the taxation of commercial properties which do not sell as frequently as residences.  Long-term commercial property owners benefit from assessments lower than the actual market value of their properties.

An unintended consequence of Proposition 13 is that some homeowners resist selling their long-term homes with lower assessed values because they cannot afford or do not wish to increase their property tax obligation.  We will write about this in a future post.

From a historical perspective it is interesting that Jerry Brown was Governor in 1978 when Proposition 13 was enacted and now, over 30 years later, he is again at the helm as the state faces a difficult financial crisis.  Proposition 13 is sure to be part of the dialog!


January 16, 2010

One of the questions prospective home buyers often ask is “How much will my property taxes be?”

This amount is determined by the County Tax Assessor whose responsibility is to ensure that properties within the county are properly valued.  At the time of purchase a form called a “Preliminary Change of Ownership” is completed and submitted to the County along with the Grant Deed, the document which transfers title from the seller to the buyer.  This form provides the Assessor with information about the property so that the property can be property assessed.

When helping our clients budget for taxes we recommend that they allow for 1.25% of the purchase price of their new home.  This amount is generally sufficient to pay the property taxes plus certain taxes approved by the community such as school parcel taxes.

There are many laws regulating property taxes.  The most well-known is Proposition 13, The People’s Initiative to Limit Property Taxation, which was passed by the California tax payers in 1978.  The initiative limits the maximum real estate tax to 1% of the cash value of the property and restricts the amount by which property taxes can increase to a maximum of 2% per year until the property is sold again or any new construction is completed, at which the property must be reassessed.

When working with our clients helping them estimate the amount of cash they will need in order to close the escrow we often discuss the timing of property tax payments which can be confusing.  Property taxes are prorated between the sellers and the buyers, i.e. the sellers pay for taxes accrued prior to the close of escrow, and the buyers pay the future taxes due.

The County fiscal year commences on July 1 and ends on June 30.  There are two installments of property taxes.  The first payment representing the period from July 1 through December 31 is due on November 1, delinquent if not postmarked by December 10.  The second payment covering the time period from January 1 through June 30 is due on February 1 and delinquent if not postmarked by April 10.