Los Angeles Financial Planning: Don’t Forget to Take Your Property Tax Base with You

los angeles financial planning property tax

 

When buying a home in Los Angeles, most people focus on the home price — sensible, considering how much some of these homes sell for. But there’s another number that’s just as important: the property tax bill. Property taxes are the single biggest cost of home ownership after the price of the home itself. As an annual expense, a high property tax bill can be significant factor in a home purchase.

And unlike a fixed-rate mortgage, a property tax bill increases at a compound interest rate every year.

In California, the “ad valorem” portion of the tax bill increases 2% per year. While that may not seem like much, it can make an already big number even larger over time.

Recent Homebuyers Feel More Pain

If you’re a recent buyer, you’re especially impacted. California has a law called Proposition 13 that helps protect seniors (and those who have lived in a home for many years) from runaway tax bills. Instead of being taxed on the current market value of the home, which you can’t control, your tax is instead based on the amount you paid when you bought it. Then, in future years, the ad valorem tax portion of the tax bill can only increase 2% per year.

That’s good for established residents. But newcomers will pay property taxes based on what they paid for the home today. Given the high housing prices in Los Angeles, that’s likely to be significantly higher than what someone who bought in the area paid several decades ago.  As a result, you can neighbors who may pay $2,500 per year living next to someone who may pay $25,000 per year for similar homes.

Clearly, those with the highest property tax bills have probably considered moving at least once.

However, if you’re one of the lucky ones who bought years ago, you probably don’t want to lose that low property tax base. This may tempt you to stay put, possibly feeling trapped in a bigger house than what you currently need.

You Can Take It with You

Fortunately, there is a way to keep that low tax base and downsize to a smaller home. Proposition 60 (together with Proposition 90) allows you to apply to transfer the taxable value of your primary residence to a replacement property. You may do this only once, but that one move could save you thousands of dollars every year.

Unlike Proposition 13, which automatically impacts you when you purchase property, Propositions 60 and 90 must be applied for. To take advantage of this benefit, you need to meet certain criteria:

  • Either you or your spouse must be age 55 or older
  • You must buy a home of equal or lesser value
  • Both homes must be your primary residence
  • You must not have used this provision previously
  • You must file for transfer within two years of the sale of your original home

There are some additional requirements; you can review these prior to filing at this page on the Los Angeles County Assessor’s website.

Another nice feature is for inherited properties. If you inherit a home that becomes your primary residence, you are eligible to apply for a transfer when you reach age 55.

Where You Can Buy

Proposition 60 allows you to transfer your property tax base within the same county.

Proposition 90, however, allows transfer of base value from one county to another. Please note that not all counties in California participate. As of Nov. 2018, per the California Board of Equalization, the following counties allowed intercounty transfers:

Alameda, Los Angeles, Orange, Riverside, San Bernardino, San Diego, San Mateo, Santa Clara, Tuolumne, and Ventura.

Please note that these are estimated by the California Board of Equalization and subject to change at any time.   Be sure to contact the county assessor of the county where you would like to relocate to verify current participation.

How It Works

Property taxes can be confusing, so here’s an example of how this works.

Let’s say you currently live in a Los Angeles home that you just sold for $1,800,000. Fortunately, you bought this home a few decades ago, so the assessed value is only $675,000. Now, you’ve bought a new condo for $1,200,000. Normally, with tax rates averaging about 1.28% (which can vary widely; this is simply an example), you would expect to pay over $15,000 a year in property taxes on the new condo. But instead, you file for a transfer. If you’re approved, you will bring over the existing assessed value of $675,000 plus 2%. So instead of paying over $15,000 per year in property taxes, your tax bill will be about $8,812 for the first year. It can then increase 2% per year (not including special assessments, which can increase more or less depending upon their formula).

So in this case, this property tax base transfer will save you over $6,000 per year. That’s significant, especially since that savings will continue as long as you own the home.

Financial Planning Pays

This is a clear example of the benefits of financial planning.  By learning about and taking advantage of this strategy, you can save significant money.  In this specific example, you can enjoy your new home without losing the tax advantages of the old one.

For more tips on dealing with recent tax law changes that impact Los Angeles residents:

Financial Planning for Los Angeles Residents: Dealing with the SALT Tax Limitation

 

 

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