You can move and take your old property tax bill with you

Let's talk about the golden handcuffs problem as it relates to property tax.

Photo from Unsplash

Say Ruth bought her house in Whittier in 1987, raised two kids in it, and paid it off somewhere during the second Clinton administration. It's no mansion, but the house is worth about $1.1 million now. Her assessed value (the number her property taxes are actually based on) is about $300,000, because Proposition 13 has kept its increases to no more than 2 percent a year while the market did whatever the market does. Today, her tax bill runs around $3,300 a year, which might be the only cheap thing about living in Los Angeles County.

And that little tax bill is exactly why she's still there. It's too big for her now that she's alone, and the place is showing its age. Maybe she wants to move to be closer to her grandkids, but every time she prices a single-story home near them, she does the math on what that would actually cost. A new house means a new assessed value, and property taxes on an $850,000 purchase run around $9,400 a year. She'd be trading a $3,300 tax bill for one nearly three times bigger, on a fixed income. So she stays.

It's called the golden handcuffs.

Anyone who's owned a home in California long enough to see their home value go way up like that has also been held captive by California's property tax system. Jumping to a new house, even a smaller one, results in a significantly higher tax bill.

But we have good news. Proposition 19 has the keys to those golden cuffs. And many who qualify for it have no idea that it even exists.

Here's the deal

Since April 1, 2021, three groups of homeowners can sell their primary residence and carry its assessed value to a replacement home anywhere in California: (1) anyone 55 or older, (2) anyone with a severe and permanent disability, and (3) anyone whose home was substantially damaged in a wildfire or other Governor-declared disaster.

If you are 55 or older, severely disabled, or a disaster victim, your assessed value can move with you. 

The previous rules were far more restrictive: You got one transfer in a lifetime, the new house had to cost the same or less, and it had to be in the same county or one of about ten counties that opted in. Prop 19 replaced all three limits. Now the replacement can be anywhere in the state, it can cost more than what you sold, and homeowners who are 55 or older or disabled can do it up to three times. Disaster victims aren't capped at all.

You still have two years on either side of the sale to buy or build, and the two events can happen in either order.

Ruth's math

Back to Ruth (every figure here assumes a combined tax rate of about 1.1 percent, and yours will be in that neighborhood). She sells the Whittier house for $1.1 million and buys the single-story in Folsom for $850,000. Because the new place costs less than what the old one sold for, her $300,000 assessed value moves with her, intact, to a house in a different county 340 miles away. Her tax bill stays around $3,300 instead of resetting to roughly $9,400. That's about $6,000 a year that she keeps.

Now suppose the place she buys costs $1.3 million, so more than what she sold her original place for. Under the old rules, that was disqualifying and she'd have to pay the full property tax on it. Under Prop 19, she still gets most of the benefit, with an adjustment. If she buys within the first year after her sale, the comparison point is 105 percent of her old home's sale price, which is $1,155,000. Her new house exceeds that by $145,000, so her new assessed value is $300,000 plus $145,000, or $445,000. Her tax bill lands around $4,900 a year instead of roughly $14,300. Buying in the second year, the cushion grows to 110 percent. It's not the full transfer, but it's much better than starting over.

And if you're wondering where these numbers come from: your assessed value is printed on your property tax bill, usually labeled total assessed value. From there the formula is straightforward. Take what your current home would sell for, raise it by 5 percent if you'd buy within a year after selling (10 percent in the second year), and if the new home costs that much or less, your assessed value simply moves with you. If it costs more, add the difference, and that's your new assessed value. Multiply by about 1.1 percent to get your rough yearly bill. And if you'd rather have a person run the numbers with you, we’re happy to help with that.

The fine print

The rules are certainly friendlier than they used to be, but the details make a difference.

Both homes have to be your principal residence. The one you sell must have been your home, and you have to move into the replacement and qualify for the homeowners' exemption there. Rentals or vacation homes don't qualify on either end.

Only one spouse needs to qualify. If you're 54 and your husband is 56 when the original home sells, you're fine, as long as the qualifying spouse is on title to the new place.

You can take your assessed home value anywhere in California, even a place that costs more. And if you’re 55 or older, you can do it up to three times. 

For the disability version, the move needs to accommodate or alleviate the disability, and the claim includes a physician's certificate. For disaster victims, the damage generally has to be substantial, more than half the home's value, from a Governor-declared disaster.

And you have to actually file. The claim goes to the assessor in the county where the new home is, on form BOE-19-B for the age-based transfer, BOE-19-D for disability, or BOE-19-V for disaster relief. File within three years of buying or finishing the replacement and the relief goes back to your move-in date. File later and it still works, but only from the year you file forward, which can mean quietly overpaying for years.

Since you're the one reading up on this topic, you (or someone you care about) might be exactly the person who this can help. It's for anyone in the 'golden handcuffs' type situation. Perhaps they're ready to move, but can't take on the additional tax burden with a fixed income. If they qualify, now is the time to re-assess.

Also, if a move like Ruth's is somewhere in your future, it's worth examining the rest of your estate picture, because the same Prop 19 that lets you take your tax base with you also changed what happens to that tax base when your kids inherit. We can answer your questions with how that all works, ideally before anything is listed for sale. Click the link below to book some time with us. We work with clients across California and have offices are in Studio City and Mission Viejo.