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February 8, 2010 – Propositions 60 and 90 are constitutional amendments passed by California voters that provide property tax relief for persons aged 55 and over. As specified by section 69.5 of the Revenue and Taxation Code, Props 60/90 allow, under certain conditions, the transfer of a Prop 13 factored base year value from an existing residence to a replacement residence.
Prop 60 allows transfers of valuation within the same county and Prop 90 allows transfers between different counties where transfers have been authorized by individual counties. Nevada County has not authorized Prop 90 transfers. Proposition 110, also included in section 69.5, applies the same conditions to valuation transfers for “severely and permanently disabled persons”.
In order to be eligible, the following requirements must be met:
- The homeowner or spouse residing with the homeowner must have been at least 55 years of age when the original property was sold.
- Both the sold and the acquired property must be the principal residence when owned and must be eligible for the homeowners’ exemption.
- The replacement property must be of “equal or lesser current market value” than the original property.
- The purchase or completion of the replacement property must take place within 2 years of the sale of the original property.
- This is a “one-time” opportunity, unless a person receives the benefit due to age and subsequently becomes disabled and is forced to move because of the disability. The reverse (eligible by disability followed by age) does not apply.
What this means is that in the situation where a property has been held by the same owner for a substantial length of time, and the market value has appreciated by a large amount, property tax relief is available for homeowners over 55 years of age.
If the market value of the original property is greater than the Prop 13 factored base year value, the lower valuation can be transferred to the replacement property of lesser or equal market value, rather than the replacement property being re-assessed at the purchase price. This will result in a lower property tax bill going forward.
Paul Sieving is a Realtor® with CENTURY 21 Gold Dust Realty, has been Chair of the MLS Committee, a Director of NCAOR and Board Chair of the Grass Valley Chamber of Commerce, while serving our community as a real estate professional for over 10 years. Comments, questions and thoughts are welcome at Paul@PaulSieving.com or (530) 274-0906.
January 10, 2010 – For the first time since the enactment of Proposition 13 in 1978, assessed values of (and taxes levied on) real property may see a year over year decline for the January 1, 2010 assessment date.
Proposition 13 defines taxable value as the lower of the property’s Factored Base Year Value or market value on lien date, January 1. Factored Base Year Value is the market value of the property when it was acquired by the current owner, plus the value of any new construction, plus an inflation factor of no more than 2% per year. Pursuant to Article XIII A, section 2(b), and Revenue and Taxation Code section 51, the percentage increase cannot exceed 2% of the prior year’s value.
In a letter to all 58 CA County Assessors on September 2, 2009, the CA State Board of Equalization (BOE) reported the likelihood of a negative inflation factor for the coming year. From 1978-2009, the inflation factor has always been positive and has usually (except for 5 of the 31 years) been greater than 2%. The inflation factor is based on the California Consumer Price Index (CCPI).
The opinion of the BOE as communicated to Assessors in the letter states “Accordingly, because section 51 does not distinguish between positive and negative changes in the CCPI, and because Article XIII A, section 2(b) of the California Constitution specifically provides adjustments based upon reductions in the CCPI, it is our opinion that section 51 requires factor adjustments whether positive or negative. If positive, the increase is limited to 2%. However, there is no such limitation to downward adjustments, including instances in which the net change to the CCPI is zero or less than zero.”
What this means for CA is that for the first time in over 30 years, a reduction in the annual property tax bill may be seen for a substantial majority of taxpayers.
In addition to this effect of Proposition 13, another statewide consequence of the current economic crisis is that real estate values have also declined significantly since the peak of the boom in 2005. Values statewide have declined to approximately the levels last seen in 2002, and in some cases the decline is greater yet.
Proposition 8, also enacted in 1978, requires the Assessor to enroll the lower of either: (1) the Factored Base Year Value, or (2) the market value as of the annual lien date January 1. During the real estate boom, a substantial fraction of parcels in CA changed hands and received a new (usually higher) Base Year Value. Since market values have declined for many of these properties, they must be enrolled in Proposition 8, at a value lower than the Proposition 13 value they received when they changed hands.
In Nevada County, the number of parcels that changed hands between 2002 and the end of 2008 (the apparent end of the decline in values) was at least 5% of the total, and represents as much as 20% of the total assessed value in the County. The decline in value for these properties has been as much as 50% in some cases. This effect of Proposition 8 will have a significant impact on property tax revenue, perhaps greater than any foreseeable effect of a negative inflation factor for Proposition 13 enrolled property.
What this means is that CA Counties are facing a great challenge in declining property tax revenues in the near future due to a significant decline real estate market values and possibly also in the CCPI. Truly a Double Dip.
CA Assessors are charged with implementing these laws in a way that reflects a duty to both taxpayers and the taxing authority, in this case County Governments. It is a very challenging time for Assessors and their workload will be significantly greater than usual with a complicated mix of automated processes and the need to address a flood of individual property re-assessments under Proposition 8.
Paul Sieving is a Realtor® with CENTURY 21 Gold Dust Realty, has been Chair of the MLS Committee and a Director of NCAOR, Board Chair of the Grass Valley Chamber of Commerce in 2004 and Treasurer in 2010, while serving our community as a real estate professional for 10 years. Comments, questions and thoughts are welcome at Paul@PaulSieving.com or (530) 274-0906.
Paul Sieving - www.PaulSieving.com
December 24, 2009 – Today California residential real property taxation is primarily regulated by Proposition 13 and Proposition 8.
After an assessors scandal in 1966, AB80, a reform bill enacted by the legislature, kept assessments at a uniform percentage of market value. During the real estate boom of the 1970s, home assessments escalated rapidly. By 1978, the threat to homeownership brought on by this escalation engendered new legislation in the form of Prop 13 in June, and Prop 8 in November.
Both measures were on the ballot in June and Prop 13 won due to its controlling effect on rising assessments. Once Prop 13 was in place, the effectiveness of Prop 8 as an additional control was increased and it also passed in November.
The constitutionality of Prop 13 was immediately challenged by the taxing authorities, and after a long trip through the courts, the issue of acquisition-value assessments reached the U.S. Supreme Court in Nordlinger v. Hahn. In a stunning 8-1 decision, the court in 1992 upheld California”’’s acquisition-value system.
Proposition 13 – Limits the property tax rate to 1 percent plus voter-approved bonded indebtedness, and defines taxable value as the lower of the property”’’s Factored Base Year Value (FBYV) or market value on lien date, January 1. Factored Base Year Value is the market value of the property when it was acquired by the current owner, plus the value of any new construction, plus an inflation factor of no more than 2% per year. Taxable value can increase more than 2% in one year if the property experiences a change in ownership, new construction or received any temporary reduction in taxable value in a prior tax year.
Proposition 8 – Amended Proposition 13 to provide for declines in value. Prop 8 requires the Assessor to enroll the lower of either: (1) the Factored Base Year Value, or (2) the market value as of the annual lien date Jan. 1. Prop. 8 reductions in value are temporary reductions that recognize the fact that the market value as of the January 1 lien date of a property has fallen below its current Prop 13 factored value.
Once a Prop 8 reduced value has been enrolled, that property’s value must be reviewed each year as of the January 1st lien date, to determine whether its market value is less than its Prop 13 factored value. Prop 8 values can change from year to year as the market fluctuates. When the market value of the Prop 8 property increases above its Prop 13 factored value, the Assessor will once again enroll its Prop 13 factored value. In no case may a value higher than a property’s Prop 13 factored value be enrolled.
Properties enrolled under Prop 8 provisions are not subject to the 2% annual increase limitation that applies to those enrolled under Prop 13 provisions.
The combined effect of Props 13 and 8 is to limit the escalation of residential property tax assessments to a manageable level and to provide temporary relief for the taxpayer when the market value of a property falls below the Prop 13 factored value.
The Assessor of each CA County is charged with implementing these laws for the benefit of the taxpayer, including an assessment appeal process for the taxpayer who feels that the market value of a property my have fallen below the Prop 13 factored value.
Paul Sieving - www.PaulSieving.com
November 16, 2009 - The Worker, Homeownership and Business Assistance Act of 2009 (HR3548) was signed into law in November by President Obama.
The bill deals with housing and unemployment aspects of the current economic crisis, including the Homebuyer Tax Credit. In addition to extending the first-time homebuyer tax credit, a whole new category of homebuyer is now eligible for a similar tax credit.
The $8,000 first-time homebuyer tax credit was due to expire on Nov. 30. There is a pretty good argument to be made that this tax credit has played a significant part in the apparent halt to the years-long decline in median home prices nationwide and to the increasing sales volume in many markets, including our own. In our last column, we showed that there has been a halt to price declines and substantially increased sales volume in the Nevada County market.
A consensus developed among real estate industry and government officials that expiration of this economic stimulus at a crucial time heading into the winter season might be extremely hazardous to a housing recovery in its infancy.
And so the legislation was redrafted to extend it to June 30 2010, and added a new category of tax credit for repeat home buyers.
The categories are as follows:
First-time homebuyer: A person who has not owned a home for three years or more. This credit is 10 percent of the home price, up to a maximum of $8,000.
Repeat homebuyer: A person who has lived in their current home for five consecutive years of the previous eight years. This credit is 10 percent of the home price, up to a maximum of $6,500. This program is intended for both move-up and downsizing buyers and there is no requirement that the current home be sold.
Rules that apply to both categories of buyer
- The buyer must remain in the newly purchased home as the primary residence for at least three years in order to avoid having to repay the entire credit. There are exceptions for death and certain military service.
- The buyer must be in contract to purchase by April 30, 2010, and close escrow by June 30.
- New and existing homes qualify.
- For purchases completed after Nov. 6, 2009, the maximum purchase price is $800,000. Previously there was no limit.
- The income limits are higher for purchases completed after Nov. 6, 2009.
- Under the original law, the credit was phased out for single taxpayers with Modified Adjusted Gross Income (MAGI) between $75,000 and $95,000 and for married couples with MAGI between $150,000 and $170,000.
- After November 6, the tax credit phases out at incomes between $125,000 and $145,000 for single and $225,000 and $245,000 for joint filers.
Finally, our government has come up with a way to put a few of the nearly $1 trillion of TARP funds back in our pockets at last. It’s about time!
Paul Sieving - Paul@PaulSieving.com
October 30, 2009 – As the peak selling season for the year winds down and we head into the holidays, there are some interesting numbers in the rearview mirror. Three important trends stand out as encouraging indicators that our local market is stabilizing, or at least experiencing a significant pause in the dramatic correction of the last 4 years.
Median Price – After 3 full years of steep declines in median price, from a high of approximately $450,000 in Q4 2005 to a low of approximately $290,000 in February 2009, median price has been stable around $300,000 and even shown a modest increase of more than 6% since February. It should be borne in mind that a substantial portion of the apparent 35% decline in prices since the peak is simply due to the fact that the more expensive homes are not selling and the lions share of homes sold have been modest properties under $400,000.
There is a modest uptrend in median prices over the last 8 months, and this is the longest uptrend since 2005.
Unit Volume – Seasonal changes in the number of homes sold are the norm, with the peak usually coming in the second quarter, following a low in the first quarter, in our market. Normally the difference between low and peak volumes in a given year is less than 50%, usually a lot less. This year, the increase in units sold from Q1 to Q2 was over 100%. This reflects a general recognition by consumers of excellent pricing, the most favorable interest rates in decades, and significant pent up demand. During 2009, an increasing portion of this volume was due to sales of distressed properties.
There has been a significant increase in unit volume during 2009, more than at any other time since 2004.
Distressed Sales – In a normal or rising market, the percentage of distressed sales (Short Sales and REO) is quite low, usually 5% or less. During 2008, as the number of homeowners facing challenges increased dramatically, this percentage rose into the double digits. In Q1-Q3 2009, this trend accelerated to nearly 50% in Q1, tapered off in Q2, and then peaked at nearly 60% in August. During this period, the available inventory of REO hovered around 5% of total inventory, while Short Sale inventory has been 10-15%. So, a steady 20% of inventory has been responsible for up to 60% of sales. What this means is that there has been an increasing supply of distressed properties, and the market is absorbing them very effectively, so effectively that the inventory at any given time has been relatively constant.
During 2009, the increasing supply of distressed properties has been snapped up by savvy buyers.
The first three quarters of 2009 have been very dynamic in the Nevada County real estate market. Overall unit sales as well as sales of distressed properties have increased dramatically, while median prices have stabilized and begun to show modest increases over an extended period. All of these trends are bucking the usual seasonal variations in one way or another, indicating unusually strong market forces.
When we look back on 2009-2010 in five years or so, will we be smiling or kicking ourselves about how we responded to the current opportunity?
Paul Sieving is a Realtor® with CENTURY 21 Gold Dust Realty, has been Chair of the MLS Committee and a Director of NCAOR and Board Chair of the Grass Valley Chamber of Commerce, while serving our community as a real estate professional for 10 years. Comments, questions and thoughts are welcome at Paul@PaulSieving.com or (530) 274-0906.
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