Politichaos

Resolving the Ruckus

Proposition 5

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Changes Requirements for Certain Property Owners to Transfer their Property Tax Base to Replacement Property

initiative constitutional amendment and statute

Official Summary

Removes the following current requirements for homeowners who are over 55 years old or severely disabled to transfer their property tax base to a replacement residence: that replacement property be of equal or lesser value, replacement residence be in specific county, and the transfer occur only once.

Removes similar replacement-value and location requirements on transfers for contaminated or disaster-destroyed property.

Requires adjustments to the replacement property's tax base, based on the new property's value

Fiscal Impact: Schools and other local governments each probably would lose over $100 million in annual property tax revenue in the first few years, growing over time to about $1 billion per year (in today's dollars). Similar increase in state costs to backfill school property tax losses.

Notes

Currently, if one is over 55 and sell a house, its tax basis (what was originally paid for it) can transfer to a new house as long as the new house costs less than the selling price of the original house, and it is either in the same county or in one of the counties that have a transference relationship. Tax basis is what is used to compute property taxes, which is a primary source of funding for local services such as police, fire and teachers.

If this passes, someone over 55 could transfer a modified tax basis to any house, regardless of the selling price of the old house and purchasing price of the new house. If the new house is less than the selling price of the original house, the tax basis is actually reduced by the percentage of difference. If the new house is more, the tax basis is adjusted slightly up, based on the difference.

Example 1, downsizing:

Your Main St house was purchased for $200k many years ago. You sell it for $400k and buy a condo on Seaside Dr for $300k. Your new tax basis for the Seaside Dr condo will be:

You are under 55

$400k : Seaside Dr purchase price

You are over 55 (current law)

$200k : purchase price of Main St, which was transferred to Seaside Dr

You are over 55 (if Prop 5 passes)

$150k : purchase price of Main St * (Main St selling price / Seaside Dr purchase price) = 200 * (400/300)

Example 2, moving up:

Your Main St house was purchased for $200k many years ago. You sell it for $400k and buy a condo on Tranquility Rd for $600k. Your new tax basis for the Tranquility Rd condo will be:

You are under 55

$600k : Tranquility Rd purchase price

You are over 55 (current law)

$600k : Tranquility Rd purchase price

You are over 55 (if Prop 5 passes)

$400k : purchase price of Main St + (Seaside Dr purchase price -Main St selling price) = 200 + (600-400)