What is Proposition 5 and How Will It Affect You?

California Property Tax Initiative Prop 5A “YES” vote supports amending Proposition 13, to allow homebuyers who are age 55 and older or severely disabled to transfer their tax assessments from their previous to new home.

A “NO” vote opposes amending Proposition 13 to change how tax assessments are transferred between properties for homebuyers who are 55 and older or severely disabled.

What is Prop 5?

California Proposition 5 will allow homebuyers who are 55 and older or severely disabled to transfer the tax-assessed value from their current home to a new home regardless of the new home’s market value, the new home’s location in the state, or the homeowner’s number of moves. If the new home is a different value than the previous home, the initiative would allow for an adjusted value between the first and new values. If the new home has a higher market value then the previous home, the assessed value would be adjusted upward. If the new home has a lower market value than the previous home, the assessed value would be adjusted downward. The formulas for the adjustments would be as follows:

Upward adjustment: (assessed value of their previous home) + [(the new home’s market value) – (the previous home’s market value)] Example: An individual sold her house for $500,000. The house had a tax-assessed value of $75,000. She bought a new house for $800,000. The tax-assessed value of the new house would be ($75,000) + [($800,000)-($500,000)] = $375,000

Downward adjustment: (assessed value of their previous home) × [(the new home’s market value) ÷ (the previous home’s market value)] Example: An individual sold his house for $500,000. The house had a tax-assessed value of $75,000. He bought a new house for $300,000. The tax-assessed value of the new house would be ($75,000) × [($300,000) ÷ ($500,000)] = $45,000

Some Background Regarding California Property Tax Laws

California Proposition 13, the Tax Limitations Initiative, was initially approved by voters in 1978. Proposition 13 limits that properties are taxed at no more than 1% of their full cash value at the time of purchase even if the property value increases. Additionally, in 1986, voters approved Proposition 60, which amended Proposition 13 to allow homeowners 55 and over to transfer the taxable value of their present home to a new home, assuming the new home was of equal or less value, located in the same county, and purchased within two years of selling the prior home. In 1988, Proposition 13 was again amended when voters approved Proposition 90, allowing qualified homeowners 55 and over to transfer current taxable value of their prior home to a new home in another county if the new county participates in the program.  Currently, there are only 9 counties which participate.

How Will it Affect Santa Clara Real Estate?

If Proposition 5 passes this may open the floodgates for more sellers in Santa Clara.  Theoretically, it can make downsizing even more affordable for seniors than what is currently allowed under Proposition 60 and limits the restrictions on counties.  Sellers may leave high priced areas and flock to desirable coastal cities or areas.  Sellers now will have the option to relocate to anywhere in the state and keep or lower their property tax basis, or even upgrade and save.  Areas like Monterey County and Santa Cruz County will see an uptick in buyer activity, whereas high priced areas like Santa Clara may see an increase in listing activity as homeowners are now free to move anywhere in the state and lower their cost of living.  This may help reduce pricing and housing supply issues in Santa Clara as their will likely be more inventory for buyers.

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