Proposition 13 Amendment Could Increase Housing Affordability

Property tax is one of the biggest deterrents to current homeowners purchasing new homes.  Under Proposition 13, a homeowner’s property tax basis is set by the purchase price, subject to limited annual increases, meaning that purchasing a new home results in a significantly increased property tax basis.  This, in turn, discourages homeowners from selling, which decreases available inventory and drives prices up.  However, a recently proposed amendment to Proposition 13 would lessen the property tax increase for homeowners who sell their old home and buy a new home, thereby theoretically increasing supply and making housing more affordable.

What Is Proposition 13?

California’s Proposition 13 was enacted in 1978 and was designed primarily to prevent homeowners from facing significant increases in annual property tax payments.  Prior to Proposition 13, property tax payments were based purely on a percentage of a property’s market value.  There was no limit on annual increases in property tax assessments, and as a result homeowners could sometimes face annual increases of up to 100% in their property tax payments.  Under Proposition 13, property tax values were rolled back to 1976 values, were subject to a maximum of 1% of the property’s value (subject to some exceptions), and were subject to a maximum increase of 2% annually.

As a result, property owners became able to more accurately predict and budget for their annual property tax payments.  Property values would only be re-assessed upon change of ownership or new construction at a property.  Accordingly, if a homeowner purchased a property in 1976 for $50,000.00, he or she would be discouraged from selling the home and purchasing a new similar home for $1mm due to the increase in annual property tax payments.

What Is The Proposed Amendment To Proposition 13?

Recently, Bob Kevane, the current President of the San Diego Association of Realtors, proposed a change that would allow homeowners to sell their old homes and purchase a new home without significantly increasing their property tax basis.  Under the new proposal, if an individual sells a home and subsequently purchases a home, the individual’s tax basis would be (1) the prior tax basis plus (2) the difference between the sales price and the purchase price.  An example is as follows:

•  Home 1: Purchased for $300,000 in 2000. The original tax bill of $3,000 has now risen to $4,000 because of the annual assessment adjustments plus any permanent improvements. It sells for $500,000.

•  Home 2: Purchased for $600,000. Current law would set the tax price at $6,000. The new proposal would reduce it to $5,000 — $4,000 carried over from the Home 1 bill plus $1,000 covering the tax difference between the two home prices.

In essence, under the proposed amendment, any appreciation in value of the sold property will not be subject to property tax.

But Why?

One of the reasons for the recent drastic increase in real estate prices is insufficient supply.  In San Diego, where the proponent of the Proposition 13 amendment is based, inventory has steadily been increasing the last two years, and prices have surged as a result.  The amendment, if passed, is expected to increase the number of sales in the first two or three years by over 1 million.

The amendment could potentially stabilize prices, or drive them down, at least in the short-term.  The long-term results, however, are questionable, given that (1) the real estate market is complex and requires consideration of a variety of factors, not just property tax and (2) most homeowners currently deterred from selling their homes will likely take advantage of the amendment within the first few years.

If you would like to further discuss how Esquire Real Estate Brokerage, Inc. can help you in the Los Angeles real estate market, feel free to give us a call at 213-973-9439 or send us an email at info@esquirereb.com