Real Estate Round-Up: And now the good news

I promised you last week that I would have some good news to report from my week at the California Association of Realtors meetings in Los Angeles. First is a little history lesson.

In 2017, CAR embarked on a project designed to expand the Proposition 13 protections that exist for seniors when they sell their primary residence and purchase a replacement property in California.

CAR's goal was to provide an opportunity for every homeowner to be able to sell their primary residence and move anywhere in the state and, with some restrictions, take their existing tax basis with them. Proposition 5 was titled the Property Tax Transfer Initiative.

Why did CAR care about this proposition? Our members have reported numerous cases where seniors or permanently disabled people were unable to sell their homes, because they couldn't afford the property tax on their replacement property.

Currently, only 10 California counties allow the transfer and the transfer only worked if the purchase price was less than the originating property. They couldn't even downsize to a smaller or single-story home because the price of the new home was greater than the home they were selling. People were locked into their homes.

Also, if they took advantage of the transfer when they were in their 60s but wanted or needed to do it again in their 80s, they couldn't. By remaining in these homes, first-time homebuyers and younger families were being locked out of homes that would be perfect for them. The property tax transfer would free up homes that are desperately needed.

In order to proceed with Proposition 5, CAR assessed each of our members $100, which raised $18,904,000 to provide the initial funding to gather the signatures necessary to get Proposition 5 on the November 2018 ballot. That's a lot of money, backed by a huge commitment in the support of one of CAR's premier values, homeownership.

The big obstacle looming over the proposition was a very negative financial report from California's Legislative Analyst Office that said counties, cities and schools would lose hundreds of millions of dollars if the initiative passed.

The only problem with the analysis was that it was a static analysis which only took into account the losses and not a dynamic assessment which would have included the gains earned when new homeowners purchased the previously low tax-based homes, which in turn would cause a reassessment that would increase the property tax. In the worst-case scenario, there would have been a neutral effect.

The association licked its wounds, cut its losses and regrouped. CAR staff has worked with state legislators to create an initiative that would garner support. Out of those talks, CAR has crafted a new initiative, entitled the California Home Fairness and Primary Residence Act.

The new initiative requires CAR to once again gather signatures, this time we need to gather over 1,000,000 signatures, just to get it on the ballot in November 2020. CAR has budgeted up to $15,000,000 to gather those signatures. The association is putting its money where its mouth is. But CAR needs residents' support to get this initiative across the finish line.

My first request is when you see someone trying to get you to sign petitions, judiciously look through them and find this initiative; sign it and tell your friends to do the same.

Once we get the signatures, it will receive a proposition number and will be submitted for the November 2020 ballot. The nuts and bolts of the new initiative are this:

1. The property tax basis transfer is for seniors, permanently disabled homeowner's and property owners in state disaster areas or living on contaminated property.

2. A homeowner can take advantage of the property tax transfer three times, to any county in the state.

3. The value of the replacement property can be less, equal or greater than the transferring property, with a blended tax base being applied if the replacement property is of greater value.

4. Homeowners would have to apply for the transfer, which is how it works currently.

Three unrelated property tax reforms are proposed as part of the initiative. These are independent of the property tax basis transfer but provide some financial offset to any real or perceived losses as a result of the first part of the initiative. They are:

1. Intergenerational transfers will require that the heir reside in the inherited residence. In other words, the heir cannot retain the property for rental purposes. Also inherited business properties will not be protected. They will be reassessed at the time of transfer.

2. A cap of $1,000,000 adjusted for inflation will be added to the tax benefit when transferring a primary residence to an heir. For example, a primary residence has a tax basis value of $500,000 but could be sold for $2,000,000. If the home were reassessed to market value, its taxable value would increase by $1,500,000. Under this proposal, the first $1,000,000 will be excluded. Upon inheritance, the home's taxable value would be $1,000,000 less $500,000 plus $500,000 – the gap between the $1,500,000 and the original taxable value and market value – minus the $1,000,000 inheritance exclusion. The taxable amount becomes zero.

3. Corporate property transfers would be reassessed when 90% or more of a corporation is transferred – regardless of the increments in which it is transferred – and the real property holdings of that corporation would be reassessed to current fair market value, even if no single person or entity gains more than 50% ownership. The sale of stock in a publicly traded company through an established stock market would not count as a change of ownership.

Combining the property tax basis transfer for seniors, severely disabled homeowners and homeowners in disaster or contaminated properties, with the limits on property tax basis transfers to heirs and the corporate transfer reassessment has produced a financial result that is anticipated to provide tens of millions of dollars, each year, to counties, cities and schools.

It is also expected that the gain would continue to grow over time, to hundreds of millions of dollars per year. Suffice it to say, that's the language that state, county and city legislators want to hear.

My head's about to explode with information; I'm sure so is yours. But it's all good, and we're ready to get those signatures, pass this initiative and help many people make their next move.

Kim Murphy can be reached at [email protected] or (760) 415-9292 or at 130 N Main Avenue, in Fallbrook. Her broker license is #01229921, and she is on the board of directors for the California Association of Realtors.