San Francisco Chronicle (Sunday)
Tax relief after disasters would change under Prop. 5
California provides various types of property-tax relief to people whose homes are destroyed or substantially damaged in a disaster.
Some of these laws would change — mostly for the better for victims of declared disasters — if voters approve Proposition 5 in November.
The ballot measure would expand the ways seniors over 55, the severely disabled and declared-disaster victims could transfer their property tax assessment from one home to another in California, therebecause by avoiding a potentially steep tax increase that typically happens when homes change hands and get reassessed at current value.
Prop. 5 would apply to replacement homes purchased or built after Jan. 1, so it could affect people who lost homes in this year’s or last year’s wildfires and have not yet replaced them. It would apply only to people who lose them in a governor-declared disaster and build or buy in a different location. It would not affect homes rebuilt on the same lot, they do not involve a property transfer.
Property taxes are not on the radar of most wildfire victims, said Michael Musson, a CPA who lost his Santa Rosa home in last year’s fire. Taxes should be “a component” of the decision to rebuild or replace, “but I would never start the conversation with property taxes. The first thing should be what’s right for your family, your economics, your future, where you want to be in 10 years.”
Under current law, people who lose a home to fire, earthquake or other calamity — whether or not it’s part of a declared disaster — can ask their assessor to reduce the assessed value of their home to its current market value.
For homes destroyed by last year’s wildfires, the Sonoma County assessor generally reduced the land value by one-third and the structure value to zero, said Greg Walsh, the county’s chief deputy assessor.
Remember that assessed value is the amount subject to property taxes. Also called base-year value, it’s generally what the homeowner paid, plus the value of any major improvements, plus annual inflation of not more than 2
percent a year. With an average tax rate of 1.1 percent, a home assessed at $200,000 would pay $2,200 a year in taxes. Thanks to Proposition 13, assessed value is often much lower than market value.
When disaster victims replace their destroyed or severely damaged home, the new assessment will depend on several factors, including size, value and location.
If they rebuild on the same lot, and the new home is comparable in “size, utility, and function” as the old one, their assessment will be restored to what it would have been had the old home not been destroyed, even though they have a brand new home.
If they expand — adding a room or pool, for example — the market value of the room or pool will be added to their base-year value. This applies to homes and other property, whether or not it was part of a declared disaster, and there is no time limit on replacing the property.
If they rebuild or replace at a different location, different rules apply depending on whether they stay in the same county or move to another one. Here are two possible scenarios under current law: Intra-county transfers: If they buy or build a home in the same county as the destroyed one, and the market value of the new home is up to 120 percent of the market value of the old home just before it was destroyed, they can transfer their old base-year value to the new home. The extra 20 percent is basically a freebie that goes untaxed.
If the value of the new home exceeds 120 percent of the old home, the amount over 120 percent is added to their old base-year value. To get this relief, homes or other property had to be destroyed in a governordeclared disaster and replaced within five years. Voters approved this relief under Proposition 50 in 1986. Inter-county transfers: If they build or buy in a different county, the replacement home will be assessed at current market value unless they meet five criteria: The old home was their primary residence, it was destroyed in a declared disaster, they replace it within three years, the new one is of “equal or lesser value” than the old one before it was destroyed, and it’s located in one of 11 counties that accept transfers from disaster victims. In the Bay Area, they are San Francisco, Contra Costa, Santa Clara, Solano and Sonoma.
If they meet these requirements, homeowners can transfer their old base-year value to the new home, rather than having the new home assessed at current value. This was part of Proposition 171, passed in 1993.
This tax break was patterned after Propositions 60, 90 and 110, which let homeowners over 55, or severely disabled people sell their primary residence and — within two years before or after the sale — transfer its base-year value to a new home of equal or lesser value in the same county or in one of 11 counties that accept transfers from seniors and the disabled. (In typical fashion, these are not the same 11 counties that accept transfers from disaster victims.)
To allow for inflation, current law lets seniors, the disabled and disaster victims spend a bit more on the new home than the old one was worth. Those inflation factors would no longer apply under Prop. 5, according to the California Board of Equalization.
Prop. 5 would let seniors, the disabled and declared-disaster victims transfer their old baseyear value to a replacement home of any value, anywhere in the state, any number of times.
If they bought a more expensive home, the difference in market value between the old and new homes would be added to their old base-year value. If they bought a less valuable home, their base-year value would be proportionately reduced according to a formula.
Prop. 5 would treat inter-county and intracounty transfers the same. This would simplify things, but those who relocate within the same county would lose the 20 percent “freebie” they get under current law, according to the board’s analysis of the measure.
Suppose a fire victim bought an existing home in the same county for 50 percent more than the old one was worth just before the fire. Under current law, only 30 percent would be added to the old assessment. Under Prop. 5, 50 percent would be added, the board says.
The California Association of Realtors, which sponsored Prop. 5, disagrees with that analysis. “We do remove the constitutional requirement that the property be comparable,” said its lobbyist Christopher Carlisle. But if you did get a comparable property, meaning up to 120 percent of the old home’s value, “you would still get the freebie,” he said. That was the intent of the proposition.
The board also says that Prop. 5 would eliminate the three-year replacement period that applies to inter-county transfers, but does not stipulate a different time period. The Legislature would need to define one. It also would eliminate the principal-residence requirement that applies to inter-county transfers, but only for disaster victims (not seniors or the disabled).
The Realtors association also disputes those interpretations. Carlisle said the intent is to retain the three-year replacement period for disaster victims and restrict the transfer to primary residences. “We in no way want to take away anything” that disaster victims are entitled to currently, Carlisle said. If the proposition does that, the Legislature could correct it, he said. The Sonoma County assessor’s office has a good explanation of current law at https://bit. ly/2RR3tkK.
Kathleen Pender is a San Francisco Chronicle columnist. Email: kpender @sfchronicle.com Twitter: @kathpender