Proposition 5: Changes Requirements for Certain Property Owners to Transfer Their Property Tax Base to Replacement Property.
Should the California constitution be amended to increase the ability of certain homeowners to obtain tax relief by transferring their Prop. 13-related tax base to a replacement property?
Taxes based on the value of real property provide a major revenue source for local governments, schools, and special districts. Such taxes equal a property’s assessed value times the applicable tax rate. Proposition 13, as amended, limits property taxes by limiting both value and rates. The tax rate is capped at 1% of the assessed value, which can grow annually by no more than 2%. Reassessment to market value is required for newly purchased or newly constructed property, or if ownership changes.
Exemptions from these reassessment triggers are allowed for homeowners over the age of fifty-five or who have a severe disability. They may transfer the assessed value of a prior home to a replacement residence of equal or lesser market value. The new home must have been purchased within two years of selling the prior home and be located within the same county or in another that permits inter-county transfers. This exemption can be used only once.
Prop. 5 would expand a homeowner’s ability to transfer assessed value to a new home. The market value of the replacement home could be greater or lesser than that of the prior home. The transferred value will be adjusted through the use of a formula. It would be increased if the new home is worth more, or decreased if it is worth less. An increased value will still be less than that based on the current market value. The house could be anywhere in California and the homeowner is not limited to a single exemption. The new home still must be the owner’s principal residence and be acquired within two years of the original home’s sale. Prop. 5 also applies to situations in which the original property is damaged by a declared disaster or made unusable by contamination.
- Local governments. Prop. 5 would have a net effect of reducing local revenue by about $100 million per year at first, growing to $1 billion over time. Increased sales would generate property transfer taxes of tens of millions of dollars, while county administrative costs would rise by tens of millions of dollars at first.
- Schools. Annual reduction in school revenue would begin at about $100 million and grow to $1 billion. Most school losses would be offset by equivalent increases in state funding, thereby increasing State spending by the same amounts.
