As election day nears, let’s take a look at Prop 5, sponsored by the California Association of Realtors – who is encouraging agents to help get the vote out.
I’ve been skeptical that, if passed, Prop 5 would bring many more long-time owners to market. The benefit only helps those who have a low property-tax basis currently, and won’t move unless they can take the same low tax basis with them.
The latimes.com featured a typical example here:
After Robert Holland’s knee surgery a few years ago, he’s had a harder time climbing the stairs in his trilevel home in the Tujunga neighborhood of Los Angeles.
Holland, a retired stagehand, wants to move from his residence at the foot of the San Gabriel Mountains to a one-story place nearby with a yard large enough to raise a goat and a couple of chickens.
But one big thing is holding him back: taxes. Holland purchased his home in 1995 and owes $4,500 this year in property taxes. If he buys a new house where he wants, his tax bill will more than double.
“It’s a matter of the quality of life,” he said, chuckling about his dilemma about whether to move. “I’m 63. I’m thinking what do I got, 20 good years left?”
The California Assn. of Realtors has a solution to Holland’s problem. It’s sponsoring Proposition 5, a statewide initiative that would provide property tax benefits for homeowners 55 and older as well as the severely disabled and natural disaster victims if they move to a new home.
Under the measure, qualifying homeowners would no longer have to pay property taxes based on the purchase price of their new home. Instead, they’d pay based on a combination of their new and old home values, lowering their property tax payment. The Realtors’ group, which has raised $13 million for the campaign, contends that the tax breaks are needed to help older residents and could free up larger homes that young families could use.
But a host of Proposition 5 opponents — including economists, local governments and labor unions — argue that older homeowners already receive disproportionately large property tax benefits in California. They say that providing additional breaks will exacerbate those disparities while costing cities, counties and schools billions of dollars a year.
Fernando Ferreira, an economist at the University of Pennsylvania’s Wharton School who has studied California’s property tax system, called Proposition 5 “completely nonsensical.”
“Right now, you’re giving a gigantic tax break to older homeowners who live in the best houses in the richest parts of the state,” Ferreira said. “This new proposition unfortunately will just perpetuate this inequality.”
Read full article here:
http://www.latimes.com/politics/la-pol-ca-prop-5-housing-tax-break-20181011-story.html
Upon further review, we see that the Hollands have it pretty good. Their tri-level house is 2,400sf on a 9,216sf lot, and their zestimate is $810,083:
But once you’ve lived in a house for 20+ years, it has become very unlikely that you will move again. Just the cost and hassle is mentally challenging, and the usual result is to make the old knee last a few more years.
Here’s why.
These folks could move right now, and take their old tax basis with them – all they have to do is buy a house that is less-expensive than the one they sell.
If they sold their house for $810,000, they could buy this one-story house on a flat half-acre that would seemingly suit all their needs, listed for $799,999:
If they were that committed to moving to a one-story house where they can have “a yard large enough to raise a goat and a couple of chickens”, they could do it today – and take their low tax basis with them.
Do they need a swankier place?
If this house isn’t good enough, and they need a single-story that costs a whole lot more, than they should pay the regular property tax.
What is behind the scenes is the C.A.R. intent to put this measure back on the ballot in 2020 with another initiative:
After gathering signatures to put the initiative on the ballot this year, the Realtors lobbied the Legislature for a deal. The group wanted to replace Proposition 5 with a separate measure that included the same tax breaks for older homeowners, but eliminated the inheritance tax break for vacation and rental properties, and clamped down on businesses that avoid higher property taxes when they buy commercial real estate.
The California legislature didn’t go for it – and this year’s initiative just seems like a trial run to test the waters. Can’t wait for 2020!
Thanks Jim, great analysis. Big one is coming in 2020 with the attempt to get rid of Prop 13.
Great thoughts, didn’t know about the CAR redo for 2020.
My thoughts:
1) Prop 5 will be a test of the power of the 55+ voting block. If it doesn’t pass then we will see a transition away from boomers to the millenials as the target of politicians.
2) Many 55+ people want to move counties. Prop 90 allows this but only between counties with agreements. That isn’t true for many. Lot’s of older people want to move to sunny or quieter locals and Prop 5 would finally allow that and Prop 5 would allow for multiple moves.
3) I think the authors of the CA voting pamphlet stating that only “several ten thousand” would utilize Prop 5 is a huge underestimate. There are 38 million people in CA and probably about 8 million are over 55+. If 20K used Prop 5 that’s only 1/4 of 1% of the seniors, really? Whether it’s the convenience of a single story, moving closer to grandkids, or getting a newer home by the beach, it’ll be more widespread.
But yeah, it probably won’t pass, Californians love their taxes.
2) Many 55+ people want to move counties. Prop 90 allows this but only between counties with agreements. That isn’t true for many. Lot’s of older people want to move to sunny or quieter locals and Prop 5 would finally allow that and Prop 5 would allow for multiple moves.
Thanks for checking in Tom!
Your #2 is the one I question the most, and the one that needs to kick in for Prop 5 to make a difference. We already know that few seniors need to buy a more-expensive home, so if people don’t want to move to the boondocks, then there won’t be much impact from Prop 5.
Move closer to the grandkids? Absolutely.
Move from urban coastal counties to the boondocks? Boomers like where they live, and will consider moving to the boondocks only if they really need the money. If that’s the case, they can also get a reverse mortgage instead and accomplish the same without moving – and have no payments too. But they are spending their kids’ inheritance – boo-hoo on the kids if they don’t like it.
A few of points:
– Property tax comprises only 25% of California school funding, the bulk coming from state income tax: https://ed100.org/lessons/whopays
– Sellers will pay max marginal rate state income tax (I believe currently 13%) on the gain of the sale. In the example above, lets assume original purchase price $100K so $500K x 13% = $65K = 118 years compensation for the $550 property tax difference in the “Less Expensive Home” example (actually more but I’m too lazy to do the Future Value calculation)
– New buyers of the original property will pay tax on the current market value, another windfall.
– Sellers of the new home will probably make some profit, and pay income tax as well, more state gravy.
IMHO, if prop 5 encourages sales of low basis properties, it will be a huge windfall for the state. Teachers should be the ones getting out the vote.
Prop 5 will create competition to lower taxes to attract residents. Cities and towns love stuck tax serfs.