I. Background Information:
In 1978 California passed Proposition 13, which defined how property taxes are calculated and reassessed. Property taxes are calculated by multiplying the property's tax assessed value by the tax rate. The standard tax rate in the state is set at 1%, per the proposition. Therefore, residents pay 1% of their property's value for real property taxes. The base year value is set when you originally purchase the property, based on the sales price listed on the deed.
Proposition 13 also states that the property's assessed value cannot increase more than 2% per year. (Cal. Rev. & Tax Code § 69.5(g)(2)). At the beginning of each year, the county board of assessors completes reassessments on each property. Typically, the value will increase by the allowed 2%. The property is then taxed 1% of this new value. However, if the homeowner made improvements or completed renovations on the property, the assessor factors this into the new value as well. There can be different tax values for one year, depending on when the construction is completed. For example, if the improvement was completed with three months left in the year, the first nine months will be taxed at 1% of the original value and the last three months will be taxed at 1% of the value including improvements.
This property tax structure benefits those who reside in one home for a long period of time. When a new home is purchased, the property’s base value is set using the new sales price. The new owner is taxed 1% of the purchase price and each year thereafter the property is reassessed and typically the taxable value is increased the maximum 2% of the base price each year. The assessed value is not the same as the market value. Therefore as long as the property’s market value is rising more than 2% each year, the owner is paying a lower tax rate than the fair market value.
For example, a home purchased twenty years ago for $200,000 would have been initially taxed at $2,000 (1% of the purchase price). For the next twenty years the assessed value would be increased 2% each year over the previous year’s assessed value. (First year’s assessed value = the purchase price or $200,000; second year’s assessed value = $200,000 x 102% or $204,000; third years assessed value = $204,000 x 102% or $208,080; and so on). After 20 years of this compounding, the assessed value of the home would be $291,362 and the property tax of 1% would equal $2,913/year.
If that property is sold for $650,000, the new owner would pay property taxes equal to 1% of their purchase price -- $6,500. If the selling homeowner purchases a home with a price of less than $650,000 and purchases a $500,000 home, the property taxes would be calculated on that purchase price – 1% of $500,000 or $5,000. In essence the homeowner is now paying more tax on a lower priced home. The homeowner was paying $2913/year in taxes on a home valued at $650,000, they are now paying $5,000/year on a home valued at $500,000.
This jump in tax basis was burdensome on the elderly and disabled who are often on a fixed incomes. It also created challenges for empty-nesters who wished to downsize. Propositions 60, 90, and 110 were designed to eliminate this additional tax burden.
II. Proposition 60/90/110 Overview:
Proposition 60 authorized the California State Legislature to provide a special method of establishing assessed value for replacement residential property acquired by a homeowner over the age of 55. Namely, it allowed homeowners over the age of 55 to transfer the assessed value of their present home to a replacement home, if the replacement home was located in the same county. (Cal. Rev. & Tax Code § 69.5(a)(1) and (2))
Proposition 90 expanded Proposition 60 to allow for transfers from one county to another county in California. It is the discretion of each county to authorize such transfers. As of June 5, 2015, the following eleven counties in California have an ordinance enabling the intercounty base year value transfer: Alameda; Orange; San Diego; Tuolumne; El Dorado; Riverside; San Mateo; Ventura; Los Angeles; San Bernardino; and Santa Clara. (California State Board of Equalization website at www.boe.ca.gov/proptaxes/faqs/propositions60_90.htm). Once a city passes a Proposition 90 ordinance, the city may not opt out for 5 years. (Cal. Rev. & Tax Code § 69.5(a)(2)).
Proposition 110 then expanded existing Propositions 60 and 90 to allow the same tax basis transfer to severely and permanently disabled property owners within the same county and from one California County to another.
With these measures in place and using the example above, the home owner, if he/she meets the eligibility requirements, may transfer the assessed value of a prior property to a newly purchased property. A person selling a property which has a market price of $650,000, but an assessed value of $291,362, may be able to transfer that lower assessed value to the new property. Their property taxes would commence at $2,913 annually rather than increasing to $5,000/year.
These measures allow the elderly the ability to downsize without having to increase their taxes and also frees up the inventory of larger homes for younger, employed homebuyers that are more able to afford the higher taxes.
III. Eligibility Requirements:
Under certain conditions a taxpayer who is 55 years of age or older may transfer the Proposition 13 base-year assessment value of his or her principal residence to any replacement dwelling of equal or lesser value in the same county and other designated counties. (Cal. Rev. & Tax Code § 69.5(a)(1) and (2)). The code requires certain conditions be met to receive this tax benefit.
The taxpayer or the taxpayer’s spouse must be 55 years old at the time of the sale of the original property. (Cal. Rev. & Tax Code § 69.5(g)(1)). The claimant must provide either proof of age or certify under penalty of perjury that the age requirement is satisfied. (Cal. Rev. & Tax Code § 69.5(f)(2)). Only one spouse needs to meet the age requirement. (Cal. Rev. & Tax Code §§ 69.5(b)(3) and (g)(1)). Only one of the spouses (or ex-spouses) is eligible for the exemption. If both are at least 55 years old, they must determine by mutual agreement who will take the exemption. (Cal. Rev. & Tax Code § 69.5(d)(3)).
A claimant must be an owner or co-owner of the original property as a joint tenant, a tenant in common, or a community property owner. A spouse of the claimant is also considered a claimant if the spouse is a record owner of the replacement dwelling. Since a registered domestic partnership is not considered by California law to be a married couple, the registered domestic partner of a claimant is not a spouse and is not deemed to have used his/her one-time-only exclusion under section 69.5. An owner of record of the replacement property who is not the claimant's spouse is not considered a claimant, and a claim filed for the property will not constitute use of the one-time-only exclusion by the co-owner even though that person may benefit from the property tax relief.
This exemption is limited to individual taxpayers. The statute is silent as to its applicability to those cases in which the taxpayers have title to the property in a revocable living trust. (Cal. Rev. & Tax Code §§ 69.5(g)(9) and (11)). However, the California State Board of Equalization website states, “You qualify for the benefits if you are the present beneficial owner of the trust, not simply the trustee of the trust. For property tax purposes, the property owner is the person who has the present beneficial interest of a trust. The trustee holds legal title to trust property but may not necessarily be the present beneficial owner of it. It is recommended that taxpayers consult the local assessor’s office.” (CA BOE at www.boe.ca.gov/proptaxes/faqs/propositions60_90.htm)
For non-married co-owners, if a replacement dwelling is purchased or constructed by all of the co-owners and each co-owner retains an interest in the replacement dwelling, only one co-owner needs to be at least 55 and use the property as a principal residence in order for the property to qualify for the reassessment exemption. (Cal. Rev. & Tax Code § 69.5(d)). However, only one of the co-owners can take advantage of this reassessment exemption. They must determine by mutual agreement which one it will be. (Cal. Rev. & Tax Code § 69.5(d)(2)). If two co-owners occupied separate units in their original, multi-unit property, each one is eligible for the exemption if he or she purchases a separate replacement dwelling. (Id.)
This exemption is available for any dwelling owned and occupied by a taxpayer as his or her principal residence, unless the dwelling is receiving a different real property exemption. The dwelling may be a single family home, a unit in a common interest development (e.g., co-op, condo, town-house) or a mobile-home. (Cal. Rev. & Tax Code §§ 69.5(b)(7) and (c)).
In order to claim this exemption, a taxpayer must be both an owner and resident of the original property either at the time of the sale of that property, or within two years of the purchase or new construction of the replacement dwelling, and the property must be his or her principal residence. Moreover, a taxpayer is not eligible for the tax relief until he or she actually owns and occupies the replacement dwelling as his or her principal place of residence. (Cal. Rev. & Tax Code §§ 69.5(b)(1) and (4)). The replacement property must be eligible for either the Homeowner’s Exemption or Disabled Veterans’ Exemption.
Under the original version of the law, enacted by Proposition 60, the replacement dwelling, including the land on which it was situated, had to be located entirely within the same county as the taxpayer’s original property. However, Proposition 90 extended the rule of Proposition 60, under certain circumstances, to other counties. The county board of supervisors of the county in which the replacement property is located must adopt an ordinance making the provisions of Proposition 90 applicable to their county.
If the original property has a separate living unit that is used as a rental, its full cash value would be allocated between the main residence and the rental unit and only the value of the unit the claimant occupies would be compared to the value of the replacement dwelling. The factored base year value being transferred would be adjusted for both the separate unit and that portion of land used to support the second unit. A unit would be considered separate from the main residence if it has its own kitchen, bathroom facilities, and entrance and is used for purposes incompatible with the homeowners' exemption.
The market value of the separate living unit (land and improvements) would be deducted from the market value of the total property. Only the amount of the indexed base year value allocated to the original residence would be transferred. If, however, the separate living unit is used solely as a guest house, it may be considered part of the principal residence and the full cash value of the entire property may be transferred to the replacement property, even if the new property does not have such a separate living unit.
In determining whether the "equal or lesser value" test is met, it is important to understand that the market value of a property is not necessarily the same as the sale or purchase price. The assessor will determine the market value of each property. If the market value of the replacement dwelling exceeds the "equal or lesser value" test, no relief is available. The full cash value of the original property as of the date of its sale must be compared with the full cash value of the replacement property as of its date of purchase or completion of new construction.
If the replacement dwelling is purchased or built prior to the sale of the original property, then “equal or lesser value” means the full cash value (i.e., sales price) of the replacement dwelling cannot exceed the full cash value (sales price) of the original property. If the replacement property is purchased or constructed during the first year after the sale of the original property, then “equal or lesser value” means that the full cash value of the replacement property cannot exceed 105 percent of the full cash value of the original property. If the replacement property is purchased or constructed during the second year after the sale of the original property, then “equal or lesser value” means that the full cash value of the replacement property cannot exceed 110 percent of the full cash value of the original property.
For example, if the original property sold January 1, 2003 for $500,000, the replacement property can cost up to $525,000 if it is purchased or constructed on or before January 1, 2004 (but after January 1, 2003) and it can have a purchase price of up to $550,000 if it is purchased or constructed on or before January 1, 2005 (but after January 1, 2004). (Cal. Rev. & Tax Code § 69.5(g)(5)).
The original property must be sold and subject to reappraisal at full market value. A property that is given away or acquired by gift or devise will not qualify because nothing of value was exchanged. Section 69.5 requires a "sale" of the original property and a "purchase" of a replacement dwelling. Sale and purchase are statutorily defined as a change in ownership for consideration. This is a two-part test: (1) the property must be subject to change in ownership and (2) something of value must be exchanged for the property.
- Replacement Property
A taxpayer has either two years before the sale of the original dwelling or two years after the sale of the original dwelling to purchase or construct the replacement property. For this purpose, a “sale or purchase” occurs when title to the property is transferred (e.g., date of close of escrow). “Construction” occurs as of the date of completion. The taxpayer must actually own and occupy the new property as his or her principal residence within this period. (Cal. Rev. & Tax Code §§ 69.5(a)(1) and (b)(5)).
The adjustment of the base-year value of the replacement dwelling is determined by the latter of, the date the original property is sold, the date the replacement dwelling is purchased, or the date construction of the replacement dwelling is completed. (Cal. Rev. & Tax Code § 69.5(h)). The base-year value of the original property cannot be transferred to a replacement dwelling until the original property is sold. In this case, the taxpayer would pay taxes on the new residence based on its purchase price until the old residence is sold. (Cal. Rev. & Tax Code § 69.5(b)(4)).
Regardless of the reason, if the new construction is not completed within two years, the property will not qualify for property tax relief. There is no provision for exceptions due to hardship or other factors which may have prevented compliance with the two-year time period from the date of sale of the original property.
After both the sale and the new purchase have been completed, an application must be filed with the county assessor where the replacement property is located. The claim form, BOE-60-AH, Claim of Person(s) at Least 55 Years of Age for Transfer of Base Year Value to Replacement Dwelling, may be obtained from the assessor's office. A claim for exemption from reassessment pursuant to Proposition 60/90/110 must be filed within three years of the date the replacement dwelling is purchased or the construction of the replacement dwelling is completed. (Cal. Rev. & Tax Code § 69.5(f)).
A claim that is filed after the three-year filing period may receive the benefits commencing with the lien date of the assessment year in which the claim is filed. Retroactive benefits from the date of transfer are not available. The full cash value of the replacement property in that assessment year shall be the base year value from the year in which the property was transferred, factored to the assessment year in which the claim is filed. The factored base year value of any new construction which occurred between the date of sale and the date the prospective relief is being applied should also be added. (Id.)
A taxpayer may take advantage of this law only once. Once a homeowner has filed and received this tax relief, neither the homeowner nor their spouse who resides with them can ever file again, even upon a spouse's death or if the parties divorce. However, if a claimant transfers the base-year value to a replacement property because he or she is at least 55 years old and, subsequently, becomes severely and permanently disabled, then he or she may transfer the base-year value again. (Cal. Rev. & Tax Code § 69.5(b)(7)). The base year value transfer, however, is not available in the reverse situation; if one receives the benefit due to disability, then they cannot subsequently claim the relief for age.
- Replacement Property
Proposition 60 allows transfers of base year values within the same county. Proposition 90 allows transfers from one county to another county in California (intercounty) and Proposition 110 allows the transfers for permanently disabled property owners. To be eligible for these tax benefits: (1) the homeowner or spouse residing with them, must have been at least 55 years of age when the original property was sold; (2) the replacement property must be the principal residence; (3) the replacement property must be of equal or lesser "current market value" than the original property; (4) the replacement property must be purchased or built within two years (before or after) of the sale of the original property; and (5) both properties must have been eligible for the homeowners' or disabled veterans' exemption either at the time it was sold or within two years of the purchase or construction of the replacement property.