Real Estate Reporter, May 2005

REPLACING YOUR HOUSE AND 55 OR OLDER?
DON'T OVERLOOK POSSIBLE PROPOSITION 60 BENEFITS

By Carrie L. Folendorf

In June 1978, California voters approved Proposition 13 to protect themselves against dramatically rising property taxes. Prior to the enactment of Proposition 13, all real property was assessed at fair market value on an annual basis. This method resulted in the tripling of assessed property values during the 16-year period prior to the adoption of Proposition 13.

To stem this rate of growth, Proposition 13 established an acquisition-value assessment system, by which property is assessed at its fair market value when acquired through a "change of ownership" or by new construction. Thereafter, the annual increase in the taxable value of property is limited to the lesser of the rate of inflation or two percent.

The intention of Proposition 13 was to keep property tax increases at a manageable level; however, the enactment of it has had the unintended consequence of discouraging people from changing their residence, even as their family circumstances change.

I. Proposition 60

To encourage people age 55 or older to move to smaller residences, thereby freeing up larger homes more appropriately sized for families, Proposition 60 was approved by voters in November, 1986. Proposition 60 allows homeowners 55 years and older to transfer the base-year value of their principal residence to a newly purchased or constructed residence in the same county provided that they meet certain requirements. Essentially, it allows a person 55 or over to purchase or construct a new residence without paying higher property taxes than he/she was paying on his/her original residence.

Under this property tax exception, the assessor transfers the base value of the original residence to the replacement residence. Proposition 60 originally required that the replacement property be located within the same county, but two years later California voters passed Proposition 90 (see below for discussion of this Proposition) which expanded the transferability of qualifying property.

a. Eligibility Requirements/Key Provisions

The key eligibility requirements and/or restrictions that must be satisfied in order to claim Proposition 60 benefits are detailed below:

• The replacement property must be the owner's principal residence eligible for the Homeowners' Exemption.
• The seller of the original residence, or spouse residing with the seller, must be at least 55 years of age, as of the date that the original property is transferred.
• The replacement property must be of equal or lesser current market value than the original.
• The original residence and replacement property must be located within the same county. However, some counties have passed Proposition 90.
• The replacement property must be purchased or newly constructed within two years (either before or after) of the sale of the original property.
• Proposition 60/90 relief cannot be granted if the claimant, or spouse, was granted relief in the past.
• Proposition 60/90 relief is available for, but is not limited to single-family residences, condominiums, units in planned unit developments, cooperative housing corporation units or lots, community apartment units, mobile homes subject to local real property tax, and owners' living premises which are a portion of a larger structure.
• In most instances, if more than one owner of an original property is eligible for Proposition 60/90, they must choose among themselves which one will use the benefits. This regulation is of particular importance to divorcing couples who are both over the age of 55.

b. Proposition 90

To be eligible for Proposition 90 benefits, these same requirements and/or restrictions apply. Proposition 90, as approved by California voters, is a local option law, with each county having the option to participate or not. If a county has adopted a Proposition 90 ordinance, a homeowner is allowed to transfer the base-year value of his/her principal residence from another county to a newly purchased or constructed residence in the county that offers Proposition 90 benefits, provided, however, that he/she meets all other Proposition 60/90 requirements. If the county from which the homeowner is moving from does not have a Proposition 90 ordinance, the eligibility of the homeowner is not affected.

Thus far, you can transfer your property tax base between seven different counties in California. As of November, 2004, these seven cooperative counties under Proposition 90 are as follows: (1) Ventura; (2) Los Angeles; (3) Orange; (4) San Diego; (5) Alameda; (6) San Mateo; and (7) Santa Clara. A county's adoption of a Proposition 90 ordinance is not mandatory, however, and is subject to change. Therefore, you should always contact county officials before you purchase your replacement property.

II. Purchasing Replacement Property for More than the Value of Your Original Residence – Is it Possible?

Although Propositions 60 and 90 provide tax relief to a growing demographic of people, one of the disadvantages of the law is that the replacement property must be of "equal or lesser" value.

Under Proposition 60, "equal or lesser value" means:

• 100% or less of the market value of the original property if a replacement property is purchased before an original property is sold.
• 105% or less of the market value of the original property if a replacement property is purchased within the first year after an original property is sold.
• 110% or less of the market value of the original property if a replacement property is purchased within the second year after an original property is sold.

If a replacement property is purchased for anything in excess of that allowed under the definition of "equal or lesser," the replacement property is totally disqualified.

The question thus becomes, what happens if you want to purchase replacement property with a fair market value greater than that of your original residence? Whether you choose to move to a more expensive county (which has a Proposition 90 ordinance in effect), or you desire to purchase property in a more desirable area within the same county in which you currently reside, are there any options to obtain Proposition 60 benefits?

Although the answer under the letter of the law seems clear, creative legal planning may produce an alternative. Under Section 65.1 of the California Revenue and Taxation Code, "when an interest in a portion of real property is purchased or changes ownership, only the interest or portion transferred shall be reappraised." This results in the bifurcation of the tax bill, with the new owner paying property taxes on their percentage interest at a rate based on the newly assessed value of the property, and the old owner paying property taxes on their percentage interest in the property at a lower rate.

Using this same rationale, it is possible to purchase replacement property, in excess of the value of your original property, as a tenant-in-common with another person or entity, and hold a percentage interest in the replacement property, of equal or lesser fair market value than your original residence, and thereby qualify for Proposition 60 benefits. These benefits, however, would only apply to your percentage interest in the property.

Example: Mr. Jones owns a house with a property tax basis of $500,000. Mr. Jones sells his home for $1,000,000. Mr. Jones then desires to purchase replacement property within one year for $1,500,000. Under Proposition 60, if Mr. Jones purchased the entire $1,500,000 property on his own, he would not qualify for Proposition 60 benefits as the value of the replacement property exceeds that of his original residence. However, what if Mr. Jones bought a 2/3rd tenants-in-common interest with his son (a trust or an LLC that Mr. Jones created) and his son purchased the remaining 1/3rd interest? Since Mr. Jones' 2/3rd tenancy-in-common interest (or $1,000,000 interest) qualified in all other respects for Proposition 60 benefits, Mr. Jones may be able to transfer his Proposition 60 benefits to his 2/3rd interest in the property. Of course, the assessor may attack this structure on a number of possible legal theories. Legal counsel should be consulted before attempting such a structure.

Proposition 60 is a tax benefit that should not be overlooked by people 55 or older. With a little bit of creative legal planning, qualified homeowners may not have to.

If you have any questions regarding this bulletin, please contact Stacey Olliff, Esq., at 310.281.6306 or solliff@ecjlaw.com. Correspondence regarding information contained in this issue or address corrections should be sent to Cynthia S. Kaiser, Ervin, Cohen & Jessup LLP, 9401 Wilshire Boulevard, 9th Floor, Beverly Hills, CA 90212-2974. If you would like to receive copies of any of ECJ's other publications, please contact Ms. Kaiser at 310.281.6328 or ckaiser@ecjlaw.com.