Tax Loopholes Save Older Home Buyers Money

Q: In a recent column a writer thanked you for helping him to claim a $2,000 property-tax refund under an exemption to Proposition 13 available to older taxpayers. I would like to know more about this exemption. --S.S.

A: Your request is just one of many similar letters received on this subject, so we will again cover the special Proposition 13 property-tax reassessment exemptions available to California home buyers over age 55.

The first of these loopholes was approved in November, 1986, when California voters passed an initiative allowing homeowners over age 55 to transfer the assessed value of the home they were selling to a new home. This initiative effectively allowed these older homeowners to bypass provisions of Prop. 13, also known as the Jarvis Amendment, that automatically set the sales price of a home as its assessed value. However, this initiative, approved by voters as Proposition 60, contained two important restrictions: The replacement house had to be of equal or lesser value than the old home, and both the old and replacement homes had to be in the same county.

Enter Proposition 90. In November, 1988, California voters overwhelmingly approved another initiative eliminating the second restriction. This allowed homeowners over age 55 to transfer the assessed value of their old home anywhere within the state so long as the value of the new home was the same or less than that of the old. But the initiative stipulated that homeowners could only take advantage of Prop. 90 if the county into which they were moving voted to participate in the special property assessment program created by Prop. 90.

So far, the boards of supervisors of just 13 counties--Alameda, Contra Costa, Inyo, Kern, Los Angeles, Marin, Modoc, Orange, Riverside, Santa Clara, San Diego, San Mateo and Ventura--have agreed to participate. (Because the Ventura County Board of Supervisors only voted earlier this year to join the program established under Prop. 90, the exclusion only covers Ventura County homes whose purchase is recorded on or after May 4, 1992. Home purchases recorded prior to that date--even if they meet the other criteria of the Prop. 90 exclusion--are not eligible for this generous tax break.)

Why do only 13 of the state’s 58 counties participate in this program? Counties are leery about joining the program since it potentially restricts the amount of property-tax revenue they can collect without any commensurate decrease in the amount of public services they would be required to provide their residents.

But the program has proved popular with older taxpayers who now have the freedom to move without facing the same tax consequences of their action that younger homeowners do.

Under the Jarvis Amendment--which was supported by many of the same older homeowners who now seek to escape its clutches--the assessed value of a home was set as of March, 1975, and allowed to increase just 2% per year as long as its owner as of 1975 lived there. Once sold, however, the house would be reassessed at fair market value, essentially its sales price.

Local governments, responsible for providing police and fire protection and a host of other services whose demand increases in direct proportion to the population, benefit every time a home sells for more than its previous sales price, and they have come to count heavily on home sales to increase the public coffers.

Until 1986, the automatic property-tax reassessment contained in Prop. 13 kept many older homeowners from moving into smaller, retirement housing because the property-tax hikes were too great.

For example, if a couple has been living in their home since 1974, it might have a property-tax assessment of $75,000 and be worth well over $300,000 or $400,000 on the open market. Even if the couple were to buy a smaller, less expensive home, their property taxes might still double or triple since they would be based on the purchase price of the new home.

That’s why older homeowners sought and, with the help of the state’s real estate lobby, won an exemption from the Jarvis Initiative and are now allowed to keep their old property-tax assessment levels. So far, the state Board of Equalization reports, fewer than 50,000 homeowners have invoked their right to the exemption.

If you are at least age 55 and moving within the county where you now reside, you are eligible for the Proposition 60 exemption. If you are moving to one of the 13 counties that have voted to join the special assessment program, then you can take advantage of the Prop. 90 exemption.

In either case, to claim the exemptions you need only to check a box on the Preliminary Change in Ownership Report that is filed in the county recorder’s office after you purchase your new home.

Later, when the county assessor’s office sends you a Change in Ownership Statement, you must mark the box on that form signaling that you are eligible for the exemption.

Note that you have only three years after purchasing your new house to claim the exemption from your county assessor’s office. If you fail to claim it within that period, it is forever lost.

Law Requires 1st IRA Return After Age 70 1/2

Q: I turned age 70 1/2 this year and am required to take a distribution from my individual retirement account. How does this work? --J.A.R.

A: The law requires that you take your first withdrawal from your IRA no later than April 15 of the year following that in which you turn age 70 1/2. Subsequent mandatory annual withdrawals must be taken by Dec. 31.

You may take your first mandatory IRA withdrawal this year or any time before April 15, 1993. However, if you elect to defer your first withdrawal until next year, you will still have to take your 1993 withdrawal before Dec. 31, 1993, thus giving you income from two withdrawals to report on your income tax filing for that year.