Readers sound off on ‘empty nest’ plan
Readers had lots to say about my column last Sunday on the proposed ballot initiative that would expand the ways California homeowners 55 and older could sell their primary residence and transfer its property tax assessment to a new home, thereby avoiding a potentially big property tax increase.
Some were excited about the prospect, while others said the capital gains tax is a bigger impediment to selling a longheld home. Many questioned a state government report that said the initiative, sponsored by the California Realtors Association, would result in a net decrease in property tax revenue. And several empty nesters said they like their big homes and shouldn’t be pushed into downsizing so larger families could move in.
“Your column came across just short of elder abuse,” Doris Watkins wrote in an email. “You did not even consider the seniors who have worked hard all their lives and want to enjoy their home and things they have. … The initiative has merits, but your article doesn’t reflect the humanities of living to be a senior. After working hard entire lives, so what if they want to keep and stay in their home?”
The initiative, which appears headed toward the November ballot, “really doesn’t go far enough to address the ‘problem,’ as the Realtors see it, of those they deem ‘over housed.’ It’s not just seniors who are guarding their empty rooms,” wrote Barbara Nagata. In addition to “families who built those monster homes for their kids ... let’s not forget all
those second and third homes people have selfishly bought which are left unoccupied most of the year. There’s definitely an ‘underutilized’ resource here, also.”
The initiative would amend Proposition 13, which fixed the statewide property tax rate at 1 percent of assessed value and said property generally can be reassessed only when it’s sold. In between sales, the assessment can go up by no more than 2 percent a year, plus the value of additions and major renovations. As a result, many long-tenured homeowners are paying a fraction of the property tax they would pay if they sold and bought another home, even a smaller one.
Two subsequent propositions, 60 and 90, give California homeowners 55 and older a once-in-alifetime opportunity to sell their primary residence and transfer their property tax assessment from that home to a replacement home. The homeowner generally can’t pay more for the replacement home than they got from the sale of the original home.
The new initiative would let homeowners 55 and older transfer their current assessment to a replacement home in California county an
number of times. They could even transfer it to a
home, although the difference in price between their old and new homes would be added to their existing assessment. If they purchased a less expensive home, their existing tax assessment would be reduced according to a formula, which doesn’t happen now.
A Legislative Analyst’s Office report said the initiative would increase real estate transactions but result in a net loss of property tax revenue totaling a few hundred million of dollars per year in the early years, rising to billions of dollars per year over the long term.
Reader Mike Mitschang and others challenged that conclusion. His point was that when a long-term homeowner older than 55 sells a home, the huge tax increase on that home would more than offset the foregone tax increase on the home the senior is purchasing.
The Realtors Association raised the same argument. The analysis “looks only at the reduced property tax (and, thus, lost revenue) that results when a senior homeowner transfers their property tax base to another home,” the association said in an email. It “does not factor in the tax revenue that is gained when the original home is sold” and reassessed upward.
Brian Uhler of the analyst’s office said the report did take both sides of the transaction into account and still came up with a net loss. “If we didn’t, our number would be even more negative,” he said.
He explained that when seniors transfer their low property tax base to another home, the tax on the replacement home does not increase, like it would if a younger person bought it. That’s a negative for tax revenue. The tax on the original home does increase, assuming a young person buys it. That’s a positive for revenue. Although the amounts won’t match up exactly, overall those two transactions are a wash.
If the new tax incentive encourages more seniors to make this move, it’s still a wash.
“What people forget is that some people over 55 would make these moves anyway,” even if their property tax goes up, Uhler said. If they get a tax break for doing what they would have done otherwise, that’s a net negative for tax revenue. That’s where most of the projected tax losses would come from.
Uhler said an estimated 115,000 California homeowners 55 and older moved in 2016, according to U.S. Census Bureau data. But only 7,926 homeowners transferred their property tax base to a new home in fiscal 2015-16 because they were older than 55 or disabled, according to state data.
The Realtors association also said the analysis failed to factor in the additional income and sales tax revenue that would be generated if more people bought and sold homes and spent money fixing them up. “We believe the reassessment of the original home as well the economic activity associated with the sale and purchase of homes will offset the LAO projected revenue loss,” it said. The association has hired the Berkeley Research Group to review the legislative analyst’s report.
What the state really needs is more housing, and unfortunately the proposed initiative doesn’t create it. When people move out of state, that does free up housing, but the expanded tax incentive wouldn’t encourage seniors to move out of state. In fact it could encourage some seniors who otherwise would have moved out of state in search of cheaper housing to move within California instead.
Many readers brought up capital gains tax, which I mentioned only briefly last week because it’s complicated and I’ve written about it before. For those columns see https://bit.ly/2uUwe8J and https://bit.ly/ 2uTZ0Gs.
Gail Erb lives alone in a four-bedroom home in the suburbs and doesn’t want to move. “We bought 30 years ago for $175,000. Now, homes are selling on my block for $850,000,” she wrote. Even with the capital gains exclusion on a primary residence ($250,000 for singles and $500,000 for couples) she would still owe federal capital gains tax, state income tax and the Medicare investment tax on profits of around $425,000 (minus real estate commission). She’d rather leave the home to her children, who would pay little or no tax if they sold it quickly thanks to what’s known as a step-up in basis. “Or, if I have to move to assisted living, I can rent this place for well over $3,000 a month,” Erb wrote.
A number of readers had questions about how the existing tax break for over-55 homeowners works. I referred them to the extensive FAQ on the Board of Equalization website at https://bit.ly/ 1nVHYXS.
I’ll close with this comment from Marlene Lerner-Bigley: “I think when young people buy a house that they should get a property tax relief too and not be so gouged to have to pay exorbitant amounts. I worry that our daughters will never own anything here in California. That’s why my husband and I work on the upkeep of the house. Should we kick the bucket, they will, at least, have the house which could give them the monies they would need to purchase something on their own or keep the house.”