Frankly, the thought of a fair and open market in California ended years ago. The benefits of not moving frequently outweigh the benefits of moving. Why? Proposition 13.
Proposition 13 was passed in the guise of a way to protect families from their outrageously increasing tax bills. However, Prop 13 included commercial buildings. Commercial buildings change hands less frequently and also are much more aware of the tax appeal process. In other words, as the commercial market falls, the owners of the commercial buildings appeal their taxes. They reduce their taxes in the down market, and if they do it two years in a row, they can keep them there.
The biggest problem with Prop 13 is that it makes homeownership unfair. If you have lived in your home for several years, and a new neighbor moves in, the new neighbor is going to pay more in property taxes. Unless your new neighbor is over 55. In that case, your neighbor may have moved their tax basis from their more expensive home to their new, less expensive, home.
So, in addition to paying more for a home, the new owners are also paying a bigger tax bill. Certainly not a fair situation for your new neighbor.
Of course, this can be unfair to people who are already in their home. In my case, both of my neighbors have moved in while I’ve been in my home. Both are over 55, and were at the time they bought their home. Both of my neighbors brought their tax basis with them. On one side, my neighbor owned their previous house for over 20 years. Their tax basis is undoubtedly lower than mine, even though they paid more for their home.
I’m not complaining. I’ve been here for 20 years. My taxes are very low compared to others who have moved in without the over 55 property tax break.
When moving increases your tax basis dramatically, people don’t move. That two bedroom, one bath home that was perfect when you first married, would be great for another young couple. But the other couple never gets the chance because you add on an additional master suite. Your cost is less. The affect on your tax basis is less. And now you will remain in the home longer.
As this has happened, first time homes have been expanded to larger homes. In other words, homes that would have become available on the real estate market for new buyers are instead being turned into larger homes.
Who benefits from this? Mainly contractors. Certainly, the lack of additional tax revenue from people moving to larger, more expensive homes hurts the City and State revenues. With the current downturn in the real estate market, revenue for properties will continue to decline.
In fact, I expect that the business of appealing home’s tax basis may be a great business in the next few years. (Of course, you can do it yourself, and save the cost of having an outsider do it.)
The people lose out are the first time buyers. The people looking for smaller homes. And, as people age, because of the reduced tax basis, people are less inclined to downsize.
Why would you move from a large home with a low tax basis to a smaller home with a much higher tax basis? You wouldn’t. It doesn’t make sense. But this also affects the availability of homes for younger, larger, families.
© 2007 by Judy Kane
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