Our opinion of the effects of Proposition 19 on the future inventory of housing in the Conejo Valley and surrounding areas is offered to help understand trends that affect the real estate market. It is not to be construed as tax or estate planning advice. Consult with your tax or estate planning professional for advice regarding Proposition 19 and your real estate finances. The following examples could be subject to limitations and exclusions of the property tax codes.
Buyers are facing one of the most competitive home buying markets we have seen in decades. But there could be a glimmer of hope down the road starting April 1, 2021.
The November 2020 election saw Proposition 19 pass by a narrow margin and that could mean a slight improvement to the number of homes on the market in the coming months. Here’s why.
Homeowner’s over the age of 55, typically called Boomers, are sitting on about 32% of the home inventory across the country (and the same in Ventura/Los Angeles counties.) And a great number of Boomers still live in homes they purchased years ago, partially or mainly because they enjoy their low property tax base. And that keeps many of them from moving.
Consider a homeowner who is living in a Thousand Oaks property they purchased in 1976 for $53,000. They would be paying property taxes of ~$600 a year.
That house value today is about $800,000 (this is a real house example in Thousand Oaks). If they sold and then paid $400,000 out of the area for a more affordable home, their property taxes would be ~$4,000 a year or nearly 550% more! No wonder they don’t move!
Since 1987/88, Prop 60 and 90 allowed homeowners over the age of 55 to sell a home and purchase replacement property, of lesser or equal value, in a participating county and carry their existing property tax base with them.
Sounds good in theory. But that didn’t work for a lot of people. There were only ten participating counties out of fifty-eight and most of them were in Southern California. If they needed to move to one of the other forty-eight non-participating counties to find more affordable housing or needed to be closer to family, they had to pay the going Prop 13 tax rate (1% of the purchase price). Since they were excluded from using the benefits of Prop 60 and 90, many just chose to stay in their home.
That’s where Prop 19 comes in. Beginning April 1, 2021, homeowners over the age of 55 can sell their home and purchase another in any part of the State of California, for any price, and still keep their low property tax base. If they sell that $800,000 house they paid $53,000 for in 1976 with its $600 property tax, their next home will have a ~$600 property tax regardless of how much they pay for it. What’s more, they can do it three times during their life.
That just might encourage some homeowners to move closer to family or friends in more affordable areas of the state.
But there is a second part to Prop 19 that could free up some more homes that have been held by 55 year or older homeowners for years. In the past, when the owner passes the property to their heirs, the heir could keep the low property tax base whether they lived in the property, kept it as a rental, or sold it. A lot of property landlords acquired rental properties through family this way.
Now, under Prop 19, the heirs can only keep the low tax base if they live in the property as their principal residence (and it is limited to a $1 million exclusion.) If they keep it for any reason or rent it out, they must pay property taxes paid on its current value. This could make renting out an inherited property much less profitable given the increase in property taxes.
The bottom line is that after April 1, 2021, homeowner’s over the age of 55 can sell and move anywhere in the State of California. They do not have to buy a property of lesser value. That should provide an incentive for some homeowners to make a move they have been waiting to do for some time.
It also means that heirs who inherit property and intend to rent it out will be faced with higher property taxes. That may make renting financially unfeasible and may force them to sell.
In this tight inventory market, every little nudge to increase inventory will help!
If you are over 55 years old and looking to sell, give us a call to talk about timing and options.
Interested in how Prop-19 could help you buy or sell a property?
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