Q: I thought you’d find the following information relevant concerning one recent correspondence of yours. In that question, a homeowner was relocating within California, and the reader wanted to know about the tax consequences of that move.
One aspect you didn’t mention has to do with her property tax assessment. When it comes to moves within California, particularly within the same California county, that move may be eligible for an assessment rollover from the old home to the new home. This means that the legal maximum annual increase in property tax may continue to be applied to the taxpayer’s old assessed value on the home sold, rather than being stepped up to the new home’s value.
Many people are not aware that they may qualify for an assessment rollover and don’t look into how it works. Thus, they miss out on what could be significant tax savings. With the new cap on the federal deduction for state and local taxes, a lower state tax saves you money at both the state and federal levels.
A: Great comment, thank you. While the question in that column focused on federal income taxes, you rightly point out that a homeowner should know what happens to their real estate taxes when they move from one home to another. As you mentioned, in California, real estate tax values may not increase as fast as the home’s value increased because of enacted laws that keep assessed values from going up or limiting the increases by a small percentage.
Say you buy a home for $200,000 and the local taxing body uses that value to compute your real estate taxes. In many parts of the country if the value of the home were to go up to $400,000, you’d expect the taxes on that home to double. But in California, and in some other jurisdictions, the value the taxing body gives to that home can’t go up by more than, say, 2 percent per year. If you’ve lived in the home for 20 or more years, the home might be worth many times more than what you paid for it, but the taxes might only have gone up a little.
If you sell that home and move into another home, the real estate tax bill could be double, triple or quadruple the amount of real estate taxes on the home you sold. So some people decide not to move because they can’t afford to move. It’s cheaper to live in their current home than to sell it and buy a smaller home.
It’s not easy to qualify for a perk this big, and as you’d expect, local taxing authorities may have a significant number of hurdles that a homeowner has to overcome to keep the benefit, including age, length of homeownership and home value limits.
If you can keep the benefit, the taxing body would transfer the value from the old home to the new home. Say you sold your home for $500,000 and purchased another home for $500,000. If your old taxes were $2,500, the taxing body — if you take all the right steps — would keep the taxes on the new home at $2,500 instead of putting in a new tax bill of $15,000. We’ve made these numbers up but wanted to use them as an example.
As you pointed out, the transfer of that benefit is so significant it’s worth figuring out if it’s available in your area.
A second item that you didn’t mention is some municipalities impose a fee on the sale or purchase of a home. Sometimes those municipalities will waive that fee for a homeowner selling in the municipality and buying in the same municipality. Again, you would need to research these exclusions.
We have found municipal websites or taxing body websites are pretty good at giving out information, so start there. For example, if your property is located in Los Angeles, if you can look at the Los Angeles County Office of the Assessor website and read how to transfer the tax benefit from one home to another. You’ll note that the benefit is available to homeowners age 55 and older. Again, if your city or town has a transfer tax on the sale of property, you can always ask and see if their website indicates whether current owners that buy and sell within the city or town are exempted or can get a refund on transfer taxes paid.
Thanks for your comment.
Ilyce Glink is the author of “100 Questions Every First-Time Home Buyer Should Ask” (4th Edition). She is also the CEO of Best Money Moves, an app that employers provide to employees to measure and dial down financial stress. Samuel J. Tamkin is a Chicago-based real estate attorney. Contact them through her website, ThinkGlink.com.