BILL ANALYSIS Ó
SENATE COMMITTEE ON GOVERNANCE AND FINANCE
Senator Robert M. Hertzberg, Chair
2015 - 2016 Regular
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|Bill No: |SB 378 |Hearing |1/13/16 |
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|Author: |Beall |Tax Levy: |Yes |
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|Version: |8/17/15 |Fiscal: |Yes |
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|Consultant|Grinnell |
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PROPERTY TAXATION: BASE YEAR VALUE TRANSFERS
Allows base year value transfers to properties of greater value.
Background and Existing Law
Article XIII of the California Constitution provides that all
property is taxable unless explicitly exempted by the
Constitution or federal law. The Constitution limits the
maximum amount of any ad valorem tax on real property at 1% of
full cash value, and directs assessors to only reappraise
property when newly constructed, or when ownership changes
(Proposition 13, 1978). Voters subsequently approved change in
ownership exclusions to allow homeowners over the age of 55 and
disabled persons (regardless of age) to transfer their home's
base year values to a replacement home of equal or lesser value
within the same county (Proposition 60, 1988, and Proposition
110, 1990), or to homes in counties that adopt ordinances
allowing the transfer (Proposition 90, 1990). Ten counties
currently allow these out-of-county transfers (Alameda, El
Dorado, Los Angeles, Orange, Riverside, San Bernardino, San
Diego, San Mateo, Santa Clara, and Ventura). Taxpayers can only
transfer base year values for properties eligible for the
homeowners' exemption, must file a claim with the assessor, and
may only transfer base year values once. Base year value
transfers allow taxpayers to continue to pay property taxes at
the factored base year value of their previous home, and not on
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the cash value of their newly purchased home, often resulting in
tax savings, and is only available for a taxpayer's principal
place of residence.
Taxpayers seeking to transfer base year values cannot do so
until the original property is sold, and have two years to
purchase the replacement dwelling. State law allows for
inflationary adjustments to maintain taxpayer eligibility while
accounting for growth in property values. Without adjustments,
a taxpayer counting on transferring their base year value may be
priced out of the transfer based on local market conditions.
Currently:
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.
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.
Proposed Law
Senate Bill 378 allows disabled persons or those over the age of
55 to transfer their base year value to a home of greater value
within two years of the sale of the original property, effective
for the lien date for the 2016-17 fiscal year. The measure
applies to transfers within the same county, or to transfers
when the replacement property is located in a county that has
enacted an ordinance to allow inbound out-of-county transfers.
In the case of a transfer to a property of greater value, the
taxpayer must add to the original base year value the difference
in price between the full cash value of the original property
and the full cash value of the replacement dwelling.
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SB 378 states that when a base year value is transferred from an
original property to a replacement one purchased before the sale
of the original, and the value of the replacement dwelling has
subsequently declined, its value is considered to be its sales
price. The measure also excludes from new construction
reassessment any new construction completed within two years of
the date of sale of the original property, so long as the
taxpayer notifies the assessor within 30 days of completion.
State Revenue Impact
No estimate.
Comments
1. Purpose of the bill . According to the author, "Proposition
60 allows homeowners over the age of 55 and any severely or
permanently disabled person to transfer the base year assessed
value of their principal residence to a replacement home. For
example, if an individual purchased their principal residence in
1985 for $100,000 and then sold the home for $200,000 in 2015,
they would be able to transfer the $100,000 base year assessed
value and be taxed on that value instead of on the assessed
value of the replacement home. Due to the increased housing
market and higher housing prices, many seniors seeking to
downsize to a newer, smaller home that more appropriately suits
their needs, must buy a home with a value greater than that of
their current residence. These bills will allow seniors and any
severely or permanently disabled person to transfer their
property tax basis to another home, even if the home they
purchase has a higher sales price than their original home. To
ensure a homeowner doesn't receive more of a property tax
benefit than that to which they are entitled, these bills
require that the difference between the value of the replacement
home and that of the original residence is added to the base
year assessed value. By allowing and encouraging seniors to
downsize to newer and smaller homes, these bills will also allow
more homes to be available for families to move into."
2. Too many benefits ? Proposition 13 provided property owners
in California with substantial protections from higher property
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tax rates and annual reassessments. However, because the
initiative generally set a property's taxable value at its
purchase price plus growth of up to 2% per year, taxpayers who
sold their homes and purchased new ones will likely pay higher
property taxes, thereby levying a tax penalty on those seeking
to acquire housing that more closely meet their demands. For
example, a four-bedroom single family home may be more house
than an empty-nest couple need, but purchasing a two-bedroom
condominium may lead to a tax increase, especially if the
taxpayer's current home has appreciated in value significantly
during the time they owned it. Proposition 60 and 90 removed
that incentive and allowed persons over 55 and the disabled to
move without the tax consequence, so long as the value of the
replacement home met the definition of "equal or lesser value"
in statute. However, California already has the lowest property
tax rates and most taxpayer-friendly reassessment triggers of
almost any state in the nation, thereby providing significant
benefits to property owners, especially those that have been in
their homes for many years. SB 378 expands those benefits to
allow base year value transfers values when a taxpayer purchases
a home at a higher price than for the one they sold. The
Committee may wish to consider adding to the benefits afforded
property owners in California.
3. What's different ? SB 378 grants taxpayers the ability to
transfer base year values to homes of greater value, but not
quite in the same way as transfers to properties with lesser
values. Instead, the taxpayer must add the difference between
the full cash value of the original property and the full cash
value of the replacement property to the original base year
value. For example, an eligible taxpayer who has a base year
value of $200,000 and property taxes of $2,000 per year, sold
her home for $300,000, and purchased a replacement home for
$400,000. The new base year would be $300,000 (the $200,000
base year value of the original property plus the $100,000
difference in price between the original and replacement
dwellings), resulting in a property tax difference of $1,000
($3,000 in property tax from a base year of $300,000, instead of
$4,000 in property tax resulting from the $400,000 purchase
price of the new dwelling). By requiring the taxpayer to add
the price difference between the new dwelling and the original
property onto the base year, SB 378 reduces the amount of
property tax revenue that local agencies would have received had
a taxpayer not eligible for the base year transfer purchased the
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home, but provides a more limited form of tax benefit than
current base year transfers.
4. Who benefits ? Currently, taxpayers can only transfer base
year values to homes of equal or lesser value than the one they
sold, under the assumption that taxpayers "downsizing" will sell
their larger home at a price higher than what they pay for the
smaller replacement. SB 378 would allow transfers to properties
with greater values, likely leading to more transfers,
especially in areas of California where high local property
values make finding homes at lower prices than their current
ones difficult. Local agencies may receive less property tax
revenue to the extent that a taxpayer taking advantage of SB
378's benefit buys a property instead of one who isn't, but
these losses can be offset if the taxpayer's replacement
property is sold at a higher price than its current assessed
value. However, because SB 378 applies to transfers within a
county, as well as transfers to counties that enact an
ordinance, the revenue loss and the offset may not occur in the
same county. Additionally, SB 378's benefit depends on two
variables: the difference between the fair market value and
assessed value of the taxpayer's original property, and the
price of the replacement property. Using the example above, SB
378 saves a taxpayer $1,000 in annual property taxes when
transferring her base year value to a home with a sales price
$100,000 higher than the price at which she sold her original
property. However, that same taxpayer who sells her house for
$1 million can transfer her base year value to a property worth
$1.2 million, so long as the difference between the two prices
is added back for an assessed value of $400,000. A taxpayer not
eligible for a base year value transfer would pay three times as
much, as the tax would be based on the $1.2 million value.
5. Current subsidies . In the United States, federal and state
governments offer substantial tax subsidies for owning or
selling a home, such as:
Mortgage Loan Interest: Taxpayers may deduct interest
payments on up to $500,000 single/$1 million joint of
indebtedness used to purchase a first and second home.
Taxpayers may also deduct interest payments on up to
$100,000 in home improvement loans.
Capital Gains Exclusion: Taxpayers may exclude up to
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$250,000 single/$500,000 joint in income resulting from the
sale of their principal residence.
Deductibility of Property Taxes: Taxpayers may deduct
property taxes and some other real estate taxes from
federal income, although California's low property tax
rates limit the benefit for Californians compared to
residents of other states.
6. Amendments ? The Committee may wish to consider the
following amendments:
Refine Page 12, Lines 1 through 7, to clarify language
to account for circumstances in which the original property
declines below the value of the previously purchased
replacement property, and can no longer qualify for the
transfer.
Delete Page 14, Lines 8 through 10, to delete the new
construction exclusion for improvements made within two
years of transferring a base year value to a property of
greater value.
7. Companionship . SB 378 makes statutory changes necessary to
implement its companion, SCA 9 (Beall), which will also be heard
at the Committee's January 13th, 2016 hearing.
Support and
Opposition (1/7/15)
Support : California Association of Realtors, Howard Jarvis
Taxpayers Association
Opposition : California State Association of Counties,
California Tax Reform Association, Rural County Representatives
of California.
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