How Older Homeowners Can Get Tax Breaks

Q: I am age 55 and would like to invoke both the one-time exclusion of $125,000 in home sale profits as well as the state law allowing me to transfer my pre-1978 property tax level to my replacement home in another county. How do I make sure that I take the right steps to take advantage of Prop. 90--or is it Prop. 60? --G.B.S.

A: Taking advantage of the many laws giving preferential treatment to older homeowners is quite easy.

To claim the $125,000 exclusion on home sale profits, you need only complete Internal Revenue Service Form 2119, which asks you to declare that you are age 55 or older; have owned and lived in this house as your main residence for three of the last five years, and neither you nor your spouse have used this exemption before. (By the way, the California Franchise Tax Board allows only an exclusion of $100,000 of profits to homeowners meeting the same requirements. To claim it, you need only to file the state’s form 2119.)

Transferring the property tax basis of your old home to your new home isn’t too much harder.

But first, let’s explain this loophole in the Jarvis Amendment. In November, 1986, California voters approved an initiative allowing homeowners over age 55 to transfer the assessed value of the home they were selling to a new home, bypassing the provision of the Jarvis Amendment--also commonly referred to as Prop. 13--that automatically sets the sales price of a home as its assessed value. However, this initiative, known as Prop. 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 Prop. 90. In November, 1988, California voters overwhelmingly approved another initiative that eliminated that second restriction, setting the stage for 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, 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.

Counties are understandably leery about joining the program since it would restrict the amount of property tax revenue they will collect without any commensurate decrease in the amount of public services they would be expected to provide for their residents. 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 assessed at fair market value, essentially its sales price. Quite obviously 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.

However, the disparities created by the Jarvis Amendment, which essentially give long-time homeowners a significant tax break over newer buyers, are now under review by the U.S. Supreme Court. In February, the court heard oral arguments on whether the amendment discriminates against certain taxpayers by violating their constitutional rights to “equal protection of the laws.” The case, which should be decided by the end of the summer, is considered the stiffest test to date of the Jarvis Amendment, and there are strong indications that Prop. 13 may be in jeopardy.

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--claiming their $125,000 profit exemption--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 currently reside, you are eligible for the Prop. 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.