Prop. 90 Tax Break on Home Sales Depends on County

QUESTION: Can you please enlighten me on the state amendment just passed in the last election that dealt with transferring Proposition 13 benefits from the “just sold” house to the “just bought” house?--T. A. M.

ANSWER: Judging by the mail, this must be one of the most popular topics of discussion these days. So here’s a full and detailed explanation.

In November, 1986, state voters approved an initiative allowing homeowners over age 55 to transfer the assessed value of a home they are selling to a new home, thus bypassing the reassessment and property tax increase that typically accompanies the purchase of a new home in California. However, there were some important restrictions to that initiative. One was that the homeowners had to purchase a house of equal or lesser value than the residence they were selling, based on the actual sales price of each. Another restriction was that both the old and new residence had to be in the same county.

But in November, 1988, California voters overwhelmingly approved Proposition 90, which eliminated the second restriction and set the stage for homeowners over age 55 to transfer the assessed value of their homes anywhere within the state, providing that the value of the new home was the same or less than that of the old home.

However, there was one important caveat to Proposition 90: The county in which the replacement home is located must be a participant in the special property assessment program that Proposition 90 created. And only purchases completed after the county joined the special program are eligible for the special tax treatment.

Guess what? According to the state Board of Equalization, just two counties--San Mateo and Kern--have agreed so far to participate in this program. If you want to buy a house in either of these two counties you’re in great shape. If not, you’re not eligible for the special property tax break.

But don’t worry too much. The vast majority of California’s 58 counties are still studying whether they should join the special program, reports Verne Walton, chief of the Board of Equalization’s assessment standards division. According to Walton, the boards of supervisors in Sacramento, Santa Cruz and Monterey counties have voted not to join the program. The Riverside County board is reportedly leaning against joining because an internal study has projected a potential $20-million property tax loss over the next five years.

Many local officials oppose Proposition 90 because it reduces the total possible property tax revenues generated by home sales. And the opposition is particularly intense in fast-growing counties and counties known to be retirement havens.

Consider the dilemma: Under the existing state law established by the Jarvis Amendment in 1978, the assessed value of a home was set at its value as of March, 1975, and that value increased just 2% a year for as long as the owner kept the home. For homes sold after March, 1975, the assessed value is basically the sales price. In all cases, property taxes are limited to about 1.25% of a home’s assessed value.

You can see why local governments, which depend on property tax revenues to pay for public services, benefit every time a home is sold for more than its previous sales price. And it should be readily apparent why they would not want to encourage a loophole in the Jarvis Amendment that would reduce their potential property tax revenues.

For example, let’s say a person over age 55 owns a house in Orange County with an assessed value of $100,000. He sells his house for $300,000 and buys one in Hemet, a Riverside County retirement haven, for $200,000.

Under existing law, the assessed value of the new house would be $200,000. But under Proposition 90, the homeowner would be allowed to transfer the $100,000 assessed value from Orange to Riverside County, depriving public agencies in Riverside County of property taxes on $100,000 of assessed value--the equivalent of about $1,250 a year in taxes. That’s probably a lot of money for a retired person living on a fixed income, and it’s entirely possible that without the property tax break of Proposition 90, the retired person would stay put in his house with the $100,000 assessed value.

Enter the real estate lobby. According to government officials, real estate interests, which were a major source of support for the Jarvis Amendment 10 years ago, are now encouraging boards of supervisors throughout the state to accept the latest loophole and join the Proposition 90 program. In many cases, according to government officials, supervisors are feeling the tug between the potential loss of revenues and the wishes of the electorate, which overwhelmingly approved Proposition 90.

In Los Angeles County, the Board of Supervisors is expected to consider the issue early next month.

Q: I had hoped to open a new business last year, and throughout the year I spent a considerable sum on franchise fees, training, interest, equipment and supplies in preparation for the opening. However, because of permit and liability delays, I won’t be able to open my shop until April of this year. May I deduct my initial expenses on my 1988 tax return as though I were in business for the year?--J. S. W.

A: Sorry. Our experts say that until your business is actually a going concern, you have no “business expenses” to deduct. Furthermore, once your business is open, many of your initial start-up expenses must be amortized and deducted over a five-year period.

There may be some relief, however. You didn’t say, but if your business has been formed as a corporation, you have the right to select your own fiscal year. If you select a term that expires shortly after you open your doors, you would be able to begin claiming some of the expenses more quickly. However, this might be more trouble than it is worth since it forces you to set your fiscal year according to a set of dates that may pose additional and far greater constraints in the future.

One last note: If, for some reason, you never open your new business, you are allowed to write off all your expenses as a business abandonment.

For more information, see Internal Revenue Service Publication No. 535, “Business Expenses.”

Carla Lazzareschi cannot answer mail individually but will respond in this column to financial questions of general interest. Please do not telephone. Write to Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, Calif. 90053.