Debits & Credits

Important Property-Tax Considerations for Baby Boomers and Seniors

by Douglas Schultz & Michelle Flynn

America’s largest generation, the baby boomers, is approaching retirement age. As they transition to retirement, they are making decisions about their financial affairs, properties and investments, and transferring assets to children or other beneficiaries. One life change may be the downsizing from large family homes to something more manageable and/or convenient in their later years. There are some important property-tax considerations that could potentially save California’s seniors thousands of dollars in this transition.

Q. I am 61 years old. Is it true that I can move to a new residence within the same county, without my new home being reassessed for property-tax purposes?

A. Yes. Seniors can potentially save a substantial amount in property taxes by transferring their property-tax basis from their former residence to their new residence. Ordinarily, the value of a home is reassessed for property-tax purposes whenever there is a change in ownership. But since California passed Proposition 60 in 1986, seniors older than 54 can transfer their property-tax basis, without reassessment, from an existing dwelling to either the purchase or construction of a new home within the same county.

There are some basic rules that must be followed. The seller must be over 55 or severely and permanently disabled, and reside on a property that is eligible for the homeowners’ property-tax exemption. Both the original and replacement properties must be principal residences. The replacement dwelling must be of equal or lesser value than the original property (an exception follows). The new residence must be bought or built within two years before or after the sale of the original property. The new property must be located in the same county as the replacement property, unless the purchase is in a county that allows intercounty transfers.

If the new property is purchased or constructed prior to the sale of the original property, then the fair market value of the new property may not exceed 100% of the fair market value of the original property. The new property must be less than 105% of the market value of the old property’s sale price if it is purchased or built within one year of the original sale. This percentage goes up to 110% of the old property’s market value if the replacement property is purchased or constructed within two years. If the replacement property exceeds this equal or lesser value test, then no benefit is available.
Generally, a taxpayer can apply for and receive this benefit once in his or her lifetime. There is an exception to this rule: if someone becomes severely and permanently disabled after age 55, a second transfer can be made.

Claim forms should be obtained from the county assessor’s office. The claim usually must be filed within three years of the purchase or completion of the replacement property.

Q. I am over 55. Can I sell my residence and move to a new county without my property taxes being reassessed?

A. The answer depends on the county to which you move. Proposition 90 was passed in 1988, allowing people 55 and older to transfer tax basis, between some counties, to replacement property of equal or lesser value. Not every county participates. In the Bay Area, Alameda, Santa Clara and San Mateo counties will allow you to transfer your property-tax basis. Other counties that participate are Los Angeles, Orange, San Diego and Ventura. You should check the laws in a county prior to your transaction.

Q. Can I transfer my property to my children or grandchildren without the property tax being reassessed?

A. Yes. Proposition 58, passed in November 1986, allows for the transfer of a principal residence and up to $1 million of other real property between parents and children, without the property tax being reassessed. To receive the property-tax relief, a claim must be filed within three years by both the transferor and transferee.

Please note that in using the $1 million exclusion, the current assessed value is used, not the current fair market value. In other words, you look at the assessed value of the property prior to the transfer to determine if it is greater than $1 million. For example, an apartment building that was owned for 20 years may be worth $2 million today and have an assessed value of well below $1 million. This means that more property may be transferred to children than the current fair market value would suggest.

If multiple properties are transferred on the date of death, then the transferees must decide which property(s) will receive the $1 million exclusion. Possibly your heirs can split the exclusion if the total of all the real property transferred is less than $1 million. If the transfers occur on various dates, then the property that was first transferred will receive the exclusion. This exclusion only applies to properties located within California.

Also, there is no limit on the number of principal residences that can be transferred to children. Transfers to extended family, for example grandparents to grandchildren, without reassessment, are allowed under Proposition 193 but only when both qualifying parents are deceased. Transfers directly to a grandchild are also allowed if the grandchild’s parent (grandparents’ son or daughter) is deceased and the widow (the daughter-in-law or son-in-law) has remarried.

If you transfer the property to your child or grandchild, you will not be able to transfer your property-tax basis to a new residence of your own.

Q. Can two people over 55 who have owned separate residences combine their property-tax basis and purchase one property?

A. No. You cannot combine the property-tax basis of two properties. You will only receive the benefit if one person qualifies by comparing the fair market value of her original property to the new jointly owned property.

In conclusion, the rules previously mentioned could result in significant savings for people over the age of 55 who are planning to sell their existing properties and purchase or build new residences. Remember to check with your local county assessor’s office to familiarize yourself with the options that are available in your county and the specific filing requirements needed to complete these transactions. Property owners should consult with their tax advisors to determine the most beneficial method of transferring property, specific to their unique situations.

The opinions expressed in this article are those of the authors and do not necessarily reflect the viewpoint of SFAA or the San Francisco Apartment Magazine. Douglas Schultz is a CPA and partner in the tax practice in the San Francisco office of Burr, Pilger & Mayer, LLP. Michelle Flynn is a CPA and a tax supervisor in the Palo Alto office of Burr, Pilger & Mayer, LLP. Both can be contacted at 415-421-5757. Copyright � 2006 by San Francisco Apartment Magazine. All rights reserved.