BILL ANALYSIS Ó
AB 2668
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Date of Hearing: May 9, 2016
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Sebastian Ridley-Thomas, Chair
AB 2668
(Mullin) - As Introduced February 19, 2016
Majority vote. Tax levy. Fiscal committee.
SUBJECT: Property taxation: base year value transfers
SUMMARY: Provides that the base year value of an original
property, if owned by a person who is either severely disabled
or over 55 years of age, may be transferred to a replacement
dwelling of greater value. The difference between the full cash
value of the original property and the full cash value of the
replacement property will be added to the base year value of the
original property in order to calculate the base year value of
the replacement dwelling. Specifically, this bill:
1)Allows, commencing with the lien date for fiscal year (FY)
2017-18, the base year value of an original property, if owned
by a person who is either severely disabled or over 55 years
of age, to be transferred to a replacement dwelling of greater
value. However, the difference between the full cash value of
the original property and the full cash value of the
replacement property will be added to the base year value of
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the original property in order to calculate the base year
value of the replacement dwelling
2)Provides that the full cash value of the replacement dwelling
is determined on the sold date of the original property, if
the replacement dwelling is purchased or newly constructed
prior to the sale date of the original property and has
subsequently declined in value by the sold date of the
original property.
3)Imposes a state-mandated local program and provides that, if
the Commission on State Mandates determines that the bill
contains costs mandated by the state, reimbursement for those
costs shall be made pursuant to these statutory provisions.
4)Provides that no appropriation is made and the state will not
reimburse local agencies for property tax revenues lost by
them pursuant to this bill.
5)Takes effect immediately as a tax levy, but would only become
operative if Senate Constitutional Amendment 9 of the 2015-16
Regular Session is approved by the voters.
EXISTING LAW:
1)Requires real property to be reassessed to its current fair
market value whenever a "change in ownership" occurs, but
creates exceptions for numerous transfers. (California
Constitution, Article XIII A, Section 2; Revenue & Taxation
Code Sections 60 - 69.5.) The assessed value of the property
established initially for property tax purposes is generally
referred to as "base-year value", which is subject to annual
increases for inflation, not to exceed 2%.
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2)Allows a property owner over 55 years of age or severely and
permanently disabled a once-in-a-lifetime opportunity to
transfer the base-year value of his or her principle
residence, within two years from the sale of the original
residence, to a replacement home of equal or lesser value
within the same county or to a replacement home in counties
that have adopted ordinances allowing the transfer, provided
certain conditions are met and the county assessor is properly
notified. "Base-year" transfers allow taxpayers to continue
to pay property taxes at the amount and rate of growth of
their previous home and prevent reassessments of their newly
purchased homes to full market value.
3)Provides that, if the replacement dwelling is purchased before
the original property is sold, the taxpayer may transfer the
base-year value only if the replacement property is 100% or
less of the original property's value. If the replacement
dwelling is purchased within the first year after the sale,
then the taxpayer may transfer the base year if the
replacement property is within 105% of the original property's
value. And, if the replacement dwelling is purchased within
the second year after the sale, then the taxpayer may transfer
the base year if the replacement property is within 110% of
the original property's value.
4)Allows a homeowner, who has been granted a base-year value
transfer from his or her original residence to a replacement
dwelling, to perform new construction on the replacement
property subsequent to the transfer and exempts the new
construction from assessment. The new construction must be
completed within two years of the sale of the original
property and its fair market value plus the full cash value of
the replacement dwelling must not exceed the full cash value
of the original property.
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5)Specifies that spouses claiming the base-year transfer
property tax relief are deemed to be a single claimant. A
person is eligible to claim a base-year value transfer as a
claimant only if neither that person nor his/her spouse, who
is a record owner of the new home, has previously received
that property tax relief. Each co-owner of real property,
including domestic partners or unmarried couples, is
considered to be a separate claimant for purposes of the base
year value property tax relief.
6)Requires the assessor to determine a new base year value for
the original property that is sold, if the sale constitutes a
change in ownership.
FISCAL EFFECT: The State Board of Equalization (BOE) estimates
annual property tax revenue losses of $5.7 million. This
assumption factors in the recovering housing market and a
growing senior population. Historical trends suggest that as
real estate values increase, the number of base year value
transfer claimants increase.
COMMENTS:
1)Author's Statement : The author has provided the following
statement in support of this bill:
AB 2668 will allow seniors to transfer their property tax
basis to another home even if the home they purchase has a
higher sale price than their original home.
Proposition 60 allows seniors and the permanently disabled
to transfer the base year assessed value of their principal
residence to a replacement home in the same county.
Proposition 90 - approved by the voters in 1988 - allows
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such transfers to a home located in a different county so
long as that county has agreed to participate in the
transfer program.
However, in both cases, the value of the replacement home
must be equal to or less than the value of the original
residence. If the purchase price of the replacement home
is greater than that of the sales price of the original
residence - by any amount, even one dollar - then the base
year assessed value cannot be transferred. This is a
problem for many seniors seeking to downsize their 'empty
nest' - moving to a newer but smaller home may likely mean
having to buy a home with a price greater than that for
which they can sell their current residence.
AB 2668 would, instead, allow a transfer to a replacement
home with a value greater than that of the original
residence. However, so that the homeowner doesn't receive
more of a property tax benefit than that to which they are
entitled, the difference between the value of the
replacement home and that of the original residence is
added to the base year assessed value.
By helping seniors move out of homes that are currently too
large for them we will also add to the stock of affordable
housing which will be a great help to families just
starting out.
2)Arguments in Support : Proponents of this bill state:
Allowing seniors to transfer their property tax basis will
increase the supply of existing single-family homes
available to young families, in effect making housing more
affordable. This bill also will increase the property tax
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revenue for cities, counties and special districts as
seniors buy and sell property, thus increasing the
base-year values of the properties they buy and sell. This
bill is a win-win for both taxpayers and local governments.
3)Arguments in Opposition : Opponents of this bill state:
This bill defeats the main purpose of Proposition 60 and
90, which is to encourage seniors to relinquish their
larger homes with low property taxes and move to something
smaller or more modest, freeing up the more valuable homes
at no cost to the senior. Instead, this bill would give a
property tax advantage to those who want an even more
expensive home.
4)History of Propositions : In 1978, voters passed Proposition
13 to limit the maximum amount of any ad valorem tax on real
property to 1% of its full cash value. Under this system, the
original "base year value" of a property may increase annually
for inflation no more than 2% per year ("factored base year
value"). Property is reassessed to its current market value
only after a change in ownership or new construction occurs.
Voters subsequently approved three constitutional amendments
allowing individuals to transfer the base year value of their
home to another home that is of equal or lesser value.
Proposition 60 (1986) allowed for intracounty transfers of
base year value for individuals over age 55. Proposition 90
(1988) allowed for intercounty transfers if the replacement
home is located in a county that has opted-in to such
arrangements; 10 counties currently accept inter-county base
year value transfers - Alameda, El Dorado, Los Angeles,
Orange, Riverside, San Bernardino, San Diego, San Mateo, Santa
Clara, and Ventura. Lastly, Proposition 110 (1990) extended
these provisions applicable to seniors to severely and
permanently disabled individuals, regardless of age.
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5)How Does Current Law Work ? The base year value transfer
allows eligible homeowners to keep their prior home's
Proposition 13 protected value by transferring it to their new
home if it is of equal or lesser value. For example, under
current law, if an eligible homeowner has a home with a base
year value of $200,000 and pays $2,000 per year in property
taxes, then sells his or her home for $500,000 and purchases a
smaller yet more functional home for $500,000, the homeowner
will continue to pay $2,000 per year in property taxes, rather
than $5,000 (1% ad valorem). In this scenario, the homeowner
is able to save $3,000 per year.
6)How Does This Bill Work ? This bill will help homeowners
eligible for a base year value transfer but hesitant to buy a
new home because there are no homes on the market meeting
their needs priced lower than for what their original home can
be sold, as buying a more expensive home disqualifies them
from the transfer and results in increased property taxes.
Using the example above, under current law, if an eligible
homeowner can only find a suitable home for $700,000, the
homeowner would no longer be able to transfer his or her base
year value and would be subject to $7,000 in property taxes.
Under this bill, however, the eligible homeowner would be able
to calculate the difference between full cash value of the new
home and original home and add the difference to the original
home's base year value to transfer over. As a result, the
homeowner's new base year value would be $400,000 (the
$200,000 base year value of the original property plus the
$200,000 difference in price between the $700,000 new home and
$500,000 for which the original home sold). The homeowner
would pay $4,000 per year in property taxes, rather than
$7,000, resulting in savings of $3,000 per year.
This bill also changes the value comparison test by requiring
different dates to be used in calculating the transferred base
year value when a dip in property values occurs. If an
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eligible homeowner purchases a replacement home before selling
the original home and real estate values subsequently decline,
the full cash value of the replacement home used for purposes
of this calculation will be derived from the time of sale of
the original home instead of time of sale of the replacement
home. In all other instances, however, the full cash value of
the replacement home is determined at the time of sale of the
replacement home. Since current law does not allow base year
transfers if the replacement home is of greater value than the
original home, allowing the value of the replacement home to
be "adjusted down" would prevent homeowners from being
disqualified from a transfer if property values decline.
However, since this bill proposes to allow base year transfers
for replacement homes of greater value, it is unclear why this
specific provision of the bill is needed. Although allowing
the value of a replacement home to be "adjusted down" may
potentially lower the overall base year value calculation, the
sales price of the original home would also likely be reduced
by a proportional amount in a depressed market and negate any
such impact. Furthermore, the BOE's analysis of this bill
notes that changing the value comparison test in this manner
will trigger additional appraisals by assessors, given the
need to value property across multiple time periods. The
Committee may wish to consider whether striking this provision
would provide greater consistency and fairness in applying
base year value transfers.
7)One More Benefit for Homeowners : California has one of the
lowest property taxes and most taxpayer-friendly reassessment
triggers in the nation. The benefits are particularly
enhanced for taxpayers who have lived in their homes for many
years. This bill allows these benefits to carry over if the
homeowner elects to move into a new home that could be valued
much higher than his or her original home. The author's
office points out that this bill would not provide a taxpayer
with numerically greater property tax savings than they are
otherwise entitled to receive under current law, regardless of
the price of the new home. In the above example, the
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homeowner buying a replacement home of equal value would save
$3,000 per year in property taxes and an identically situated
homeowner buying a buying a replacement home of greater value
would still only save $3,000 per year in property taxes.
However, one of the main narratives presented to voters in
support of Proposition 13 was that seniors should not be
priced out of their homes through high and unpredictable
taxes. As such, it is unclear how allowing an eligible
homeowner to transfer the base year value of an original home
to a home that may be worth exponentially more, on which much
higher property taxes are recognized to be due, is consistent
with the purported intent of Proposition 13.
8)Amending the Constitution : Since base year value transfers
are authorized by the California Constitution, a
constitutional amendment must first be approved by voters in
order to allow base year transfers to a replacement home of
greater value. The author of this bill has also introduced
ACA 12 to make the requisite constitutional changes. This
bill subsequently provides the accompanying implementation
provisions, and changes the value comparison test which is
unrelated to implementation and would not ordinarily require a
companion constitutional amendment to take effect.
This bill currently provides that its provisions will become
operative only upon voter approval of a related constitutional
amendment, and in that event, take effect on January 1, 2017.
However, as noted in the BOE's analysis of this bill, it is
recommended that this bill take immediate effect upon approval
by voters, consistent with the other base year value
transfer-related propositions. Delayed implementation may
complicate home sales if eligible homeowners buy a more
expensive replacement home upon the proposition's passage and
expect relief that cannot be granted, or delay buying or
closing escrow on a home of greater value until the new year.
The Committee may wish to consider making this bill take
effect with voter approval of the companion constitutional
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amendment.
9)Technical Amendments : On Page 12, Line 5, insert "value"
between "cash" and "of"; and,
On Page 17, Line 39, strike "Senate" and insert "Assembly";
strike "9" and insert "12".
10)Related Legislation : ACA 12 (Mullin) allows homeowners 55
and older to transfer a base year value to a home of greater
value, subject to voter approval. ACA 12 is pending referral
to a policy committee.
ACA 6 (Brown) allows spouses to qualify individually for base
year value transfers and extends transfers to homeowners who
are the parent or legal guardian of a severely disabled child,
subject to voter approval. ACA 6 is pending hearing by the
Assembly Committee on Appropriations.
SCA 9 (Beall) is substantially similar to ACA 12. SCA 9 is
pending hearing in the Senate Committee on Elections and
Constitutional Amendments.
SB 378 (Beall) was substantially similar to this bill. SB 378
on the Senate Committee on Appropriations' Suspense File.
REGISTERED SUPPORT / OPPOSITION:
Support
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California Association of Realtors (Sponsor)
California Taxpayers Association
Howard Jarvis Taxpayers Association
Opposition
California State Association of Counties
California Tax Reform Association
Analysis Prepared by:Irene Ho / REV. & TAX. / (916) 319-2098