Older Home Buyer May Get a Break

Q: If you sell a house that was bought before Prop. 13 passed, and now you buy another house of equal or lesser value, are you now taxed according to post-Prop. 13, or do you get to keep your pre-Prop. 13 rate?-- A.R.F .

A: This subject continues to draw questions, so we will again cover the special Prop. 13 property tax reassessment exemptions available to California home buyers over age 55.

The first of these loopholes was approved in 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 Prop. 60, contained 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. In addition, a homeowner was entitled to only one transfer of a pre-Prop. 13 value.

Then came Prop. 90. Approved by California voters in November, 1988, it allows 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 is 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 12 counties--Alameda, Inyo, Kern, Los Angeles, Marin, Modoc, Orange, Riverside, Santa Clara, San Diego, San Mateo and Ventura--have agreed to participate.

Why do only 12 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 revenues they can collect without offering any commensurate decrease in the amount of public services they are expected to provide their residents. In fact, Contra Costa County has withdrawn from the program and Riverside County supervisors are thinking about it.

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, 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 sale price. Local governments benefit every time a home sells for more than its previous sale price and 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 easily double on the purchase 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. Still, the state Board of Equalization reports that few 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 12 counties that have voted to join the special assessment program, then you can take advantage of the Prop. 90 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.

One last note: You are only entitled to one exemption, either Prop. 60 or Prop. 90, over a lifetime. Once you’ve used it, it’s gone.

Payments as Co-Signer Are Fully Deductible

Q: My husband co-signed a note for a large amount of money for a friend who has now gone bankrupt. Unless we make the payments, we will lose valuable property we pledged as collateral. Are these loan payments tax-deductible?-- J.G.

A: If you guaranteed the loan with the genuine expectation that you would be repaid if you ever had to make the payments, you are entitled to consider your payments a short-term capital loss. Your payments are fully deductible against any capital gains and may offset up to $3,000 of ordinary income each year. Unused portions of the deduction may be carried forward until fully written off.

Withdrawals Must Be Taken by Year-End

Q: I am making mandatory minimum withdrawals from my individual retirement accounts using the “term certain” method. Must I make the withdrawal on my birthday or at the end of the year? --E.S.

A: You must take the distribution by the end of the calendar year.

Your question provides an opportunity to correct information offered here last month regarding the “term certain” withdrawal system. Using IRS unisex life expectancy tables, a 70-year-old taxpayer is required to take one-sixteenth of the total account in his or her first distribution. The following year, the minimum withdrawal would be one-fifteenth of the remaining amount; at age 72 it would be one-fourteenth, and so on. The required distribution is not one-sixteenth every year as previously written.