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Proposition 60: Home-Buying Tax Break

November 01, 1986

The Times article (Oct. 16), "Proposition 60 Would Give Home-Buying Tax Break to Senior 'Empty Nesters,' " provided a good review of one of the more obscure constitutional amendments proposed on the November ballot.

If approved by the voters, Proposition 60 would allow homeowners age 55 or older to transfer the assessed value of their current home to another newly purchased home of equal of lesser value. The purpose of the measure is to allow older homeowners (so-called empty nesters) to sell their homes and buy smaller residences without having their property taxes increased, as currently required by Proposition 13.

The measure's proponents argue that empty nesters would not be the only group to benefit from Proposition 60. Assemblyman Dave Elder (D-Long Beach) argues that Proposition 60 will encourage sales of homes by seniors, which in turn would open up these homes for purchase by first-time home buyers. Spurring such sales, he argues, would result in more frequent reassessment of property under the provisions of Proposition 13, and consequently, more property tax revenue for local agencies.

That argument would be valid if current tax actually discouraged senior homeowners from selling their homes and buying smaller ones. In fact, the opposite is true. A typical example illustrates why homeowners already have a substantial incentive to sell their homes at age 55.

A couple buys a home for $50,000 in 1975, when both are age 44. By 1986 the market value of the home has increased to $142,650. Because increases in assessed value are limited to 2% annually under Proposition 13, the assessed value of the home in 1986 is only $61,550. The property tax bill is $600 annually. In 1986, at age 55, the couple sells the home, realizing a tax-free capital gain of $92,600. They buy a condominium as a replacement property for $125,000. This transaction leaves the couple with $17,600 in cash. They invest the money in municipal bonds, which pay $1,412 in tax-free income each year. The property tax bill on the condominium is $1,298 annually, reflecting its assessment at full market value. The couple's municipal bond income is sufficient to pay the increase in their property tax bill, plus an additional $715 annually. Proposition 60 merely increases their windfall by $698.

It is possible to construct examples where empty nesters experience losses due to property tax increases. In most cases, however, the $125,000 capital gains exemption already provides sufficient incentive for empty nesters to move into homes of lesser value. Rather than encouraging homeowners to vacate these homes, Proposition 60 will merely provide additional tax breaks to homeowners who are already encouraged to sell their property by federal tax law.

Many of these homeowners are wealthy, yet the measures does nothing to expand the Senior Citizens' Property Tax Assistance Program, which helps low-income seniors to pay their property tax bills.

In sum, Proposition 60 provides unneeded tax breaks to homeowners who currently enjoy substantial protection from federal income taxes. It will result in revenue losses to local agencies, and overlooks the tax burden borne by low-income homeowners. It is an unfair measure and deserves a no vote.

STEVEN A. OLSEN

Sacramento

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