As the rising tide of baby boomers laps gently against the shores of retirement, one cannot help but ponder the obvious question; how does this phenomena become a topic for an entertaining post? The answer is clear, and yet, like the diamonds in the baby boomers silver anniversary band, it is multifaceted and must be viewed in the right light with thick bifocals.
It seems as one meanders down the path of life, one’s financial and logistical needs tend to change – stairs become insurmountable hurdles, neighboring fences only further peak one’s curiosity, technology just seems to get needlessly more complicated every day, and the medicine cabinet doesn’t seem large enough anymore for all the meds!
Is it time to downsize your home & keep the same property taxes?
The home that perhaps once served the needs of a growing family may eventually seem too large and cumbersome plus too costly to maintain and heat to the cozy 80 F that you now prefer. Granted, this may not occur until after the second or third attempt at launching your offspring has finally succeeded, but if one plays their cards right and keeps a few aces up their sleeve, then presto — an empty nest! After the third launch attempt or a very prolonged, multi-year first attempt at launching your little treasures, it is best to move away immediately to a home with no spare bedrooms. Even better, move and do not give your progeny the new address. Instead, either you visit them or meet them somewhere nearby an AARP convention site.
It is at this juncture that the savvy reader might want to arm themselves with a few choice real estate facts or more interesting reading material. What advantages might be given to the potential seller of a home if they survived to be 55 years or older? What implications might there be for someone who is planning from shifting their identity from “global marketing manager” to “stay at home dog mom?” It turns out that there are laws on the books pertaining to both property tax and capital gains taxation which may impact one’s decision of whether to sell and make a realtor very happy or stay put and drag down the economy!
A couple filing jointly can exclude up to $500,000 of a home’s appreciation in value from the capital gains tax.
First, things have changed. Remember how at one time you could eat just about anything? Those old rules no longer apply to you and neither do the old rules regarding selling your primary residence. Long ago if you sold your home and used all the proceeds to buy another primary residence, then capital gains taxes would be deferred until you sold your final house and cashed out. However, about 20 years ago a new rule came out that supersedes the old rule. Today, if you have made a nice little profit from the sale of your main home, you may qualify to exclude up to $250,000 of that gain from taxes. You may qualify to exclude up to $500,000 of that gain if you file a joint return with your spouse. In general, to qualify for the exclusion, you must have owned and used your home as your primary residence for a period aggregating at least two out of the five years prior to its date of sale. This means that if you are married and bought your home for $1,500,000 and sell it 3 years later for $2,100,000 then you only pay taxes on $100,000 worth of gains; the other $500,000 is tax free! This tax exemption applies to anyone, regardless of age.
Now you’re probably thinking, “wait a minute, that last tidbit applies to anyone regardless of age? Where’s my baby boomer benefits?” All right I’m getting to that – I thought at your age you would be more patient by now? The rule that may help you get out dodge and not destroy your retirement budget is Proposition 60 and 90.
Some of you may have been fortunate enough to have bought your home long ago, such that you have very low property taxes. With Proposition 60, as long as the homeowner or their spouse (if married) is 55 years of age or older, then they may sell their primary residence and purchase a new primary residence of equal or lesser value within the same county in California and transfer their current property tax base to the new property.
There are a few other key elements to this law: (1) this can only be done once per lifetime, (2) you can actually buy a home valued at 105% of your old place if the new purchase is made within one year of selling your old house, (3) you can buy a home valued at 110% of your old place if the new purchase is made after one year of selling your old house, (4) your ability to transfer your old property taxes disappears altogether if the new property is not purchased within two years after selling your old home. There are also a few rules regarding buying land and building your own house on it, but we’ll forgo those for the sake keeping this newsletter short, but sadly not simple.
This means that if you own a $2,000,000 “Knee Killer” (A.K.A. a 2-story home), but only pay $3,000 in property taxes per year, then you can downsize within the same county to a mercifully flat $1,500,000 rancher and still keep paying only $3,000 in property taxes per year instead of somewhere around $17,000. This would certainly help the precarious retirement budget.
Of course, if you keep living in the same county, this might make it easier for your kids to find you and ask for money or an unreasonable amount of babysitting. It might be in your best interest to move to another county; this is where proposition 90 comes in. Prop 90 is basically Prop 60, but it allows you to buy your new home in a different participating California county. The key here is that not all counties participate, meaning there are currently a limited number of counties that will accept your property tax transfer from another county. Currently there are ten participating counties: (1) Alameda, (2) El Dorado, (3) San Diego, (4) San Mateo, (4) Santa Clara, (5) Los Angeles, (6) orange, (7) Riverside, (8) Ventura, (9) San Bernardino, (10) Tuolumne. Participating counties do change from time to time, so you always want to check who is participating when you are ready to make your move. For updates on participating counties follow this link https://www.boe.ca.gov/proptaxes/prop60-90_55over.htm
Prop 60 and 90 are beneficial when one wants to downsize (a.k.a. ensure there is no room for the kids to move back in). However, one should exercise caution, do not downsize too dramatically. Remember that one wants to live in, not wear, their residence. Motivation to move might be to gain proximity to services (shopping, bingo, hospitals), to be closer or further away from relatives, or to realize gains on a residence.
So, you see aging is not all bad. Sure, some things have changed for the worse like (1) there was a time when you referred to your knees as right and left; not as good one and bad one, (2) you actually know what it means to ‘hang up’ a phone, and (3) it takes you a long time to scroll down on a website to select the year you were born. On the other hand, in a hostage situation you are likely to be released first, so it’s not all bad. Enjoy it!
The savings from Prop 60 might be more important than ever to seniors since Federal tax laws now limit the combined amount you can deduct from federal taxes to $10,000 for both property taxes and State income taxes.
Prop 60 sometimes does get some criticism from younger people with lots of hair and good knees, but it really should not. A retiree is not likely to downsize from a $2m home to a $1.5m house if their property taxes then jumped from $5k/year to $17k/year. However, by allowing the retiree to sell their home, you now have a new owner likely paying around $22k/year to live in the retiree’s old home while the retiree finds a new less costly place to settle. Overall, the county is collecting more in property taxes by giving the retiree this benefit, and most important, realtors get their commissions!
Prop 60 might not matter to you if you’re thinking of selling your Bay Area home and buying a small cabin in Gold Country for $200k, but it is an incredibly useful budgeting tool for someone that has strong ties in the Bay Area and does not desire to start playing banjo and making their own whiskey.
If you are thinking about taking advantage of Prop 60 and 90, then I recommend you consult an accountant as there will some paperwork that will need to be filed for you to maintain your lower property tax bill. I will also caution you not to try any shenanigans. These transactions are often scrutinized by assessors. Tricks like excluding commissions or other schemes to try to force the new purchase to meet the lower price criteria could backfire on you and then you’re stuck with a huge property tax bill that you might not be able to afford. This is one of those rare cases where honestly might be the best policy!