By Kerrin N.T. Liu
Introduction to California Proposition 60/90
If you are a California homeowner age 55 or older, you need to know about Proposition 60/90. Proposition 60 provides voter-enacted constitutional tax relief to ease the tax burden on California seniors downsizing or relocating their principal homes. Proposition 60 accomplishes this by offsetting the effects of Proposition 13 which limits property tax to 2% growth per year but, upon a change in ownership, requires a reassessment of the property at market value.
As one can imagine, the new market value on a replacement home is likely significantly higher than compared to the owner’s sold home, which had the benefit of the Proposition 13 growth limit of 2% on taxable value. Proposition 60 provided property tax relief for seniors by preventing a property tax increase if they sold their existing home and bought another home of equal or lesser value. Essentially, seniors that invoke Proposition 60 (or Proposition 90) are able to continue to pay property taxes at their existing Proposition 13 values of their sold home, as if they had never moved.
It is important to note, however, that Proposition 60 is a one-time tax benefit and the property must have been the taxpayer’s principal residence. In other words, once you have filed for and received this tax relief, neither you nor your spouse can file again, even upon your spouse’s death or if the two of you divorce. An exception to this general rule is if you become disabled after receiving this tax relief, in which case you may be able to transfer the base year value of your personal residence a second time due to disability under Proposition 110.
Proposition 60 amended article XIII A, section 2, subdivision (a) of the California Constitution by adding the following language: “[A]ny person over the age of 55 years who resides in property which is eligible for the homeowner’s exemption… may transfer the base year value of the property entitled to exemption… to any replacement dwelling of equal or lesser value located within the same county and purchased or newly constructed by that person as his or her principal residence within two years of the sale of the original property.” See Cal. Const., art. XIII A, section 2, subd. (a); Rev. & Prop Tax Code Section 69.5.
Proposition 90 is a subsequent constitutional amendment enacted in November 1988 by voter approval further enabling the transfer of base year values between counties upon the adoption of implementing legislation and of qualifying local ordinances. (Ibid.). In other words, where Proposition 60 allows transfers of base year values within the same county (intra-county), Proposition 90 allows transfers from one county to another county in California (inter-county).
In an inter-county scenario, the replacement home’s county must have an ordinance that accepts inter-county transfers via Proposition 90. In other words, it does not matter if the sold home is located in a county which has not adopted Proposition 90, only the replacement home must be in a county which has adopted Proposition 90.
As of the date of this opinion, the following ten counties have adopted Proposition 90:
Alameda County, Los Angeles County, Orange County, Riverside County, San Bernadino County, San Diego County, San Mateo County, Santa Clara County, Tuolumne County, and Ventura County.
Base Year Value and Proposition 13
In order to understand the significant tax relief which may be gained by making a claim under Proposition 60/90, we must first understand what the preservation of a sold home’s “base year value” is. Under California Constitution, article XIII A, section 1, subdivision (a), a county assessor must determine a “base year value” for property when it changes ownership, that is, the “full cash value” or “fair market value” of the property at the time of change of ownership. (§ 110.1, subd. (b).) The statute specifically states that:
“(a) For purposes of subdivision (a) of Section 2 of Article XIII A of the California Constitution, “full cash value” of real property, including possessory interests in real property, means the fair market value as determined pursuant to Section 110 for either of the following:
(1) The 1975 lien date.
(2) For property which is purchased, is newly constructed, or changes ownership after the 1975 lien date, either of the following:
(A) The date on which a purchase or change in ownership occurs.
(B) The date on which new construction is completed, and if uncompleted, on the lien date.
(b) The value determined under subdivision (a) shall be known as the base year value for the property. However, uncompleted new construction shall not acquire a base year value until completed, as described in Section 71.” See Section 110.1(a)(1)&(2).
The purchase price of a sold home for base year value purposes shall be rebuttably presumed to be the ‘full cash value’ or ‘fair market value’ “if the terms of the transaction were negotiated at arms length between a knowledgeable transferor and transferee neither of which could take advantage of the exigencies of the other ….” (§ 110, subd. (b).).
As touched upon above, the base year value or fair market value of the sold home is also affected by California Proposition 13 which limited the potential tax increase to 2% a year. The tax savings of preserving a sold home’s base year value is essentially the transfer of the sold home’s property tax the taxpayer was paying at the time of the sale, and the exclusion from reassessment of property tax upon the purchase of replacement home.
Equal or Lesser Value of Replacement Home
As discussed above, Proposition 60/90 was enacted in part to encourage a person, age 55 or older to “move down” to a smaller residence or relocate. As we analyzed in the section above, when a senior citizen acquires a replacement property worth less than the original property, he or she will continue to pay approximately the same amount of annual property taxes as before.
Acquiring a replacement property of “equal or lesser value” is also defined under Proposition 60/90. In simplest terms, the market value of the replacement property as of the date of purchase of replacement home must be equal or less than the market value of the original property on the date of sale. The meaning of “equal or lesser value” depends on when you purchase the replacement property.
100% or less of the market value of the original property if a replacement property were purchased or newly constructed before the sale of the original property
For example, if you sold the home for $1 million in market value, the new replacement home (purchased before the sale of sold home) must be valued at $1 million or below ($1 million x 1= $1 million).
105% or less of the market value of the original property if a replacement property were purchased or newly constructed within the first year after the sale of the original property
For example, if you sold the home for $1 million in market value, the replacement home bought within one year of the sale of sold home should be for no more than $1,050,000 ($1 million x 1.05= $1,050,000.)
110% or less of the market value of the original property if a replacement property were purchased or newly constructed within the second year after the sale of the original property.
For example, if a year passed and you did not purchase a replacement home, you could still participate in the Proposition 60/90 program if you bought a replacement home in year two. In this scenario, if you sold sold home at $1 million, and then bought replacement home between year 1 and 2, it should be for no more than $1,100,000 ($1 million x 1.10= $1,100,000).
Filing of Claim
In order to benefit from Proposition 60 or 90, you must proactively apply by submitting claim Form BOE-60-AH.
Per the instructions of Form BOE-60-AH, “a claim for relief must be filed within 3 years of the date a replacement dwelling is purchased or new construction of that replacement dwelling is completed…. [and that if] you file your claim after the 3-year period, relief will be granted beginning with the calendar year in which you file your claim.” Per the Board of Education (“BOE”) instructions, “As of January 1, 2007, a claim that is filed after the three-year filing period may receive the benefits commencing with the lien date of the assessment year in which the claim is filed.” Unfortunately, per the BOE instructions, “[r]etroactive benefits from the date of transfer will not be granted.”
Proposition 60/90 can be extremely advantageous for taxpayers looking to settle down into their retirement years. If you have questions about how Proposition 60/90 may apply to the sale and subsequent purchase of your principal residence, please contact our office.
Kerrin N.T. Liu is a partner and attorney at Diosdi Ching & Liu, LLP. She represents clients in federal tax controversy and collection matters. Kerrin N.T. Liu may be reached at (415) 318-3990 or by email: kliu@sftaxcounsel.com.
This article is not legal or tax advice. If you are in need of legal or tax advice, you should immediately consult a licensed attorney.