Derry's Condo Headshot

Derry's Condo Headshot

Tuesday, September 25, 2018

Our Property Taxes Could Be Lower!!!

We've had quite a bit of hesitation out of sellers and buyers due to some of the limitations with Proposition 13. Proposition 13 more or less allows someone who is older than 55 to take their property tax base with them pending they purchase a property of equal or lesser value in either the same county or a cooperating county. Not all counties participate in proposition 13.

The large reason for the hesitation is that oftentimes this is a conversation for the empty nesters. Kids have graduated from high school, aren't home much if at all and the parents are now looking at one another asking what the next chapter of their lives is going to look like. They raised their kids in a great family friendly neighborhood, but have no need to be there anymore. So where do they go where they can enjoy themselves, but have a property for equal or lesser value in order to not multiply their current property tax base so significantly. For example, I have a client now who has been looking for their next move for years. They have not yet done anything though because everything that they like comes with a price tag, but more importantly, a property tax that never goes away. It's the Benjamin Franklin quote "in this world nothing can be said to be certain, except death and taxes." This resulted in a lot of stagnation in some of these real estate tiers.

That is until potentially next year. Proposition 5 uses a new formula to calculate your property taxes and can be used after the age of 55 with no frequency limitations. As of right now, Prop 13 can only be used once. The new math is as follows:

  • Upward adjustment Formula: (assessed value of their prior home) + [(the new home’s market value) - (the prior home's market value)]

  • Example: An individual sold her house for $1,500,000. The house had a tax-assessed value of $200,000. She bought a new house for $3,000,000. The tax-assessed value of the new house would be ($200,000) + [($3,000,000)-($1,500,000)] = $1,700,000.

  • Downward adjustment Formula: (assessed value of their prior home) × [(the new home’s market value) ÷ (the prior home's market value)]
  • Example: An individual sold his house for $2,500,000. The house had a tax-assessed value of $200,000. He bought a new house for $1,500,000. The tax-assessed value of the new house would be ($200,000) × [($1,500,000) ÷ ($2,500,000)] = $120,000.

There are still many questions surrounding Proposition 5 such as on move 3 or 4 after the age of 55, do you use the affected property tax base to calculate your new property tax or do you calculate fresh based on the home being sold and the home being purchased? Can you move out of your primary residence into some place on leased land and then buy a home for $10 million and cut the property taxes in half essentially? What happens if you buy a lot and build your dream home? We're not entirely sure. I'm sure there will be some trial and error.

If Proposition 5 gets passed, how do we suspect it will impact our real estate market? I can't help but think it would invigorate our market especially in these tiers where we see some stagnation. The other aspect of Proposition 5 is that it would be statewide rather than be dependent on participating counties. Overall though, I would suspect that we could see more inventory, but more significantly, a drastic uptick in the number of transactions because there would no longer be hesitations out of our empty nesters to move into their dream homes. Their property taxes will go up, but more than likely not by some multiple.

So why would someone not want to vote for this one given all of the activity it could generate? Theoretically, if homes are getting assessed at 1% of their purchase price and that's reducing the amount of taxes, do our schools suffer? I could see making a case for this, but I also think it gives new young families opportunity to purchase a home and re-assess a lot of these first home properties. I also think that it will slowly edge up a lot of these taxes as opposed to the drastic bumps that they could see. In other words, the volume of transactions could negate the reduced property taxes per individual property. Of course all of this is speculation, but it's hard not to put the pieces together in this format. 

1 comment:

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