We hear this all of the time: “It will cost me more to move than to stay in my current home.” This is especially true for homeowners who have been in their homes for many years. Perhaps you bought your family home in Pacific Heights in 1985. You paid $700,000 for your four-bedroom, three-bath dream home with space for a basketball hoop and raised your children there. You love your house — the memories made there are priceless. But now you are 63 years old, your children are adults, and you are tired of dealing with roof gutters and yard maintenance and all the other work your house demands. You might be thinking, It’s time to enjoy my retirement.
Have you dreamed about downsizing to a shiny new condo in a luxury high-rise building or maybe a beautifully remodeled smaller house? Something turnkey, where you can lock the door and leave it safely behind to travel the world for a few months? If you read the real estate ads, you might be shocked by today’s high prices. Yes, that nice little condo, much easier to care for than your current large home, is now selling for $2 million. And in normal circumstances, the property tax basis for that condo is $2 million, significantly more than your current $700,000 basis from your purchase price 28 years ago. There is no way you want to pay more property taxes. So you think you can’t afford to move?
Let us share some good news with you, which will probably change your mind.
If you are one of these people, and you or your spouse is 55 or older, you can take advantage of Proposition 60. Prop 60 was passed in 1986 and allows homeowners, under very specific conditions, to transfer their property tax basis. This means you can still live in this wonderful city and continue to pay low taxes.
Prop 60 allows you to cash out of your large home in Pacific Heights, now worth $3 million or more, buy a home for the same or lesser value, and transfer your tax basis of $700,000 from your old home. The following are the basic guidelines, but go to the California State Board of Equalization web site for specific information (www.boe.ca.gov/lawguides/property/current/ptlg/rt/69-5.html).
• Both the original property and its replacement must be located in the same county except for the nine counties as of September 2013 that allow intercountry transfers. The nine counties that allow this under the related Proposition 90 are Alameda, El Dorado, Los Angeles, Orange, Riverside, San Diego, San Mateo, Santa Clara, and Ventura. (This means that you can move either within San Francisco or to a home in one of these counties and preserve your tax basis.)
• As of the date of the transfer of the original property, the seller or spouse living with the seller must be at least 55 years old.
• The replacement dwelling must be of equal or lesser value than the original property.
• The replacement property must have been purchased or newly constructed within two years of the sale of the original property.
• The original property must be subject to reappraisal at its current fair market value as the result of its transfer (per the Revenue and Taxation code).
• Without exception, a claim for tax relief must be filed within three years of the date of purchasing the replacement property or the completion of the new construction.
This is a one-time allowable transfer, and only one replacement property is eligible. You can’t have two people living in the same home and have each be eligible for a replacement property, and it must be your primary residence. If a spouse has already taken advantage of this allowable transfer, you may not use it again.
The example above is based on our extraordinary real estate market in San Francisco. Of course, you can transfer your basis very easily in San Francisco, but you can also consider one of the other nine counties that allow the transfer and buy into a much lower-cost real estate market.
If you want to stay in San Francisco, there are many reasons to do so. The city is vibrant and we think keeps you young, if not young at heart. There are also several neighborhoods that are up and coming and still have more affordability. A few of our favorites: West Portal for its friendly atmosphere and walkability. It truly feels like a version of Mayberry, where you know your neighbors and shopkeepers. Golden Gate Heights has fantastic views and has easy access to dining on Irving Street and close proximity to West Portal. The Inner Sunset and Sunset offer some very good value as well. Bernal Heights is red hot right now and has a small-town feel in the midst of the larger cosmopolitan city.
For walkability and easy access to downtown, we love the North Waterfront. Stroll to the Embarcadero, Ferry Building, or center of the City. Leave the hills behind. South Beach and the Mission Bay area are home to several luxury developments and great weather. Maybe it’s time to explore other neighborhoods; you’re New Year’s resolution might include a move.
This information is provided as a brief overview. If you are considering this tax advantage, please consult a professional tax specialist. If the new property is even $1 over value of your current home, you will not be able to transfer the basis.