Recently, housing advocates have renewed their challenges to Proposition 13 provisions as unfair to young homebuyers and minorities, as highlighted in a recent Medium article.
Proposition 13, a 1978 amendment to the California Constitution, limits a property’s taxable rate to 1 percent of its taxable value and freezes a property’s base year value for assessment at its fair market value in 1975, or any subsequent purchase date. From there, the base year value is adjusted every year by the percentage change in cost of living, but by no more than 2 percent per year. A change in ownership triggers reassessment, with certain exceptions. While the proposition’s original intent was to prevent homeowners from being priced out of their property, the laws apply to various types of real property owned by individuals and corporate entities.
Propositions 58 and 193 further extended the tax benefits to property transferred from parents to children and grandparents to grandchildren. This means, as property is passed down through inheritance, the base year value for assessment is frozen at the fair market value in 1975 or a subsequent purchase date. Without any use or occupancy restrictions, these inherited properties can be used a second homes, vacation homes, or rental properties.
In Los Angeles County alone, as many as 63 percent of inherited homes are used as second homes or rental properties, according to a Los Angeles Times article. This has led to a system where family-owned vacation homes are frequently assigned a much lower rate value than primary residences, which may disadvantage lower income individuals.
The housing advocates challenging Proposition 13 are pushing for additional limitations on property tax benefits, such as applying the 2-percent annual tax increase cap could only to homestead residences or treating inheritance as a transfer that triggers reassessment, as proposed in the Medium article.
However, Propositions 13, 58, and 193 were all amendments to the California Constitution, and any further amendments will require passage in both the state legislatures and through a ballot measure. A recent study found that almost two-thirds of likely California voters still support Proposition 13, meaning that proponents of change face an uphill battle against California’s one-of–a-kind property tax provisions.
Continue the discussion on Bloomberg Tax’s State Tax Group on LinkedIn: What property tax benefits does your state offer?
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