Our post titled, Reverse Mortgage Home Purchase Strategy, detailed a three-part strategy around continuing to be a home owner as opposed to selling and becoming a renter. The financial benefit to the senior and their estate is considerable. The third part of that strategy is minimizing property taxes by taking advantage of CA Propositions 60/90 when possible. This article answers the most common questions we hear about Prop 60 or 90 and provides some background information you'll need to implement the strategy.
Senior Citizen’s Replacement Dwelling Benefit
Propositions 60 & 90 allow someone 55 or older to buy or build a new home of equal or lesser value than their existing home and transfer the adjusted value to the new property. This may result in substantial tax savings. Understanding how to take advantage of these two propositions is really about reviewing a few relevant property tax basics and definitions.
Base Tax Rate
Proposition 13 was passed in 1978. It established the base year value concept for property tax assessments and fixed the CA property tax rate at 1% of assessed value plus amounts required to repay any assessment bonds approved by the voters.
You'll notice in the example below that while the base tax rate is 1% of the net assessed value, the effective rate is higher. To calculate that you have to add the other charges and then divide the total by the assessed value. ($4,263.82 / $350,000) = 1.218%.
To better understand how and why property taxes differ by location, click here for an explanation of voter-approved debt and direct levies (items marked B & C in the photo above). For an idea on the amount of bond indebtedness and effective tax rate in different California counties, click here.
Don't Forget to Consider Taxes and HOA Fees
Non deductible property charges, such as Mello-Roos, direct levies and fees are often located under the category of 'SPL ASMNT USER FEES.' In some areas, the effective tax rate can be upwards of 3%. This should be of particular interest to seniors because while a reverse mortgage eliminates the principal and interest portion of their house payment, they still have to pay property taxes, homeowners insurance and HOA dues.
For example, we had a client who wanted more house for the dollar so they moved to Lake Elsinore. They got a beautiful home for $327,000, however, their taxes, insurance, and HOA dues total $9,707 per year or $809 per month. That doesn't include a mortgage payment, which is the case with a reverse.
The other situation we see is when someone moves from a house with no HOA to a condo that might have two monthly HOA dues and they don't realize the monthly savings they had in mind.
Where Property Tax Money Goes
While this graphic is a little dated, it does a nice job showing where property tax money is spent.
How Property Taxes Change Over Time
Annual increases to the base year value are limited to the inflation rate, as measured by the CA Consumer Price Index, or 2%, whichever is less. A new base year value is established whenever a property or portion thereof has had a change in ownership or has been newly constructed.
Adjusted value is the initial base year value plus the total of each subsequent year’s adjustments. Most recently, those adjustments have been up 2% each year, however, during the recession, some people appealed their property value and had their adjusted value lowered. See Proposition 8 at the end of this article.
The California Constitution provides for the exemption of $7,000 in assessed value from the property tax assessment of any property owned and occupied as the owner’s principal residence. The exemption reduces the annual property tax bill for a qualified homeowner by up to $70.
To obtain the exemption, you must be the property owner or co-owner and you must live in the property as your primary residence. You must also file the appropriate exemption claim form with the Assessor. The exemption is only for your principal residence (not available for vacation or second homes) and there is no filing fee for the Homeowners' Exemption.
Once the exemption is granted, you do not need to re-file unless you change title on the deed. Deed title changes always occur on a purchase but only sometimes occur on a refinance - for example the borrowers change from community property to vesting in a trust.
A Homeowners’ Exemption is different than a Homestead Exemption. A Homestead Exemption is intended to protect a certain amount of the homeowner’s equity if the home is ever sold to satisfy the owner’s debts.
Equal or Lesser Value
Equal or lesser value actually depends on when you purchase the replacement property. The new property must cost the following percentage of the market value of the original property:
- 100% or less if replacement property purchased before the sale of original property
- 105% or less if replacement property purchased within 1st year after sale of original
- 110% or less if replacement property purchased within 2nd year after sale of original
Market value is not necessarily the sale or purchase price. It is determined by the Assessor and will include the value of upgrades, including those paid for outside of escrow. Usually it is the purchase price unless there is evidence that the property would have sold for another price in an open market transaction.
Proposition 60 and 90
Allows senior citizens to transfer the adjusted base year value from their current home to a replacement dwelling. Certain requirements must be met. In general, if you or your spouse is age 55 or older, you or your spouse may buy or construct a new home of equal or lesser value than your existing home and transfer the adjusted base year value of your existing home to your new home if certain requirements are met.
Proposition 60 was enacted into law in 1986 and allows the transfer of base year value as long as the new home is in the same county as the home being sold.
Proposition 90 was passed by the legislature in 1989 and it allows the transfer of base year value if moving from one county to another. As of November 2014, the counties that allowed the transfer included: Los Angeles, Orange, San Diego, Riverside, San Bernardino, Santa Clara, Ventura, Alameda, El Dorado. These counties are subject to change. You should contact the county you’re moving to verify Proposition 90 eligibility.
- You, or a spouse living with you, must have been 55 or older when the original property was sold
- The replacement property must be purchased or built within two years, before or after, the sale of the original property
- The replacement property must be of equal or lesser "current market value" than the original property; the "equal or lesser" test is applied to the entire replacement property - see CA Exclusions
- The original property and the replacement property had to qualify for the Homeowner’s Exemption or Disabled Veterans’ Exemption
- The replacement property must be your primary residence
- This is a one-time only benefit. Once you have received this tax relief, neither you nor your spouse who resides with you can ever file again unless you become disabled – see Prop 110
- The filing deadline is within 3 years of purchasing the replacement home
- Only one original owner can claim Prop 60 or 90 tax relief
- If a home is gifted to a son or daughter, you cannot still get a Prop 60 or 90 benefit. The original property must be sold and is subject to a new appraisal at full market value
There are other tax-advantaged strategies for transferring property between parents or grandparents and children. See Proposition 58 below.
Resources and Other References
Overview of the main property tax provisions in California
- Prop 13 - base year value for assessments
- Prop 8 - compare current market value versus Prop 13 value, use whichever is less
- Prop 58 - transfers between parents (and grandparents) and children (grandchildren)
- Props 60 & 90 - allows seniors to transfer value to a replacement dwelling
- Prop 110 - allows transfer of value for the disabled
- Prop 3 - transfer value when property is taken by government
To Discuss Our Reverse Mortgage Purchase Strategy
We are passionate about helping people over 62 lower their financial stress and improve their lifestyle. If you would like a complimentary consultation to discuss using a reverse mortgage to purchase a home and/or more details on evaluating your options, for yourself or a loved one, please click the Complimentary Consultation button below.
About the Author
Kent Kopen earned the Reverse Mortgage Specialist designation, March 2007, by completing training in Orlando, FL. Mr. Kopen and the firm he represents are proud members of the National Reverse Mortgage Lenders Association. We provide tools and strategies to those who offer financial advice on our website: The Reverse Advisor. Our resources are designed to help financial advisors, CPAs, estate planning attorneys and insurance professionals help seniors optimize their home equity to provide greater security and peace of mind.