by Diana L. Martinez Collaborative Lawyer and Mediator, West Coast Law & Mediation, APC
When you are trying to navigate a divorce, there are many issues you need to address. If you own property in California, your decisions about your real estate can be among the most challenging, and perilous, if you are not fully informed.
One area often overlooked when making decisions about real property are the tax consequences. The tax implications can end up making a significant impact on your financial well-being, especially if you are part of the current wave of “gray divorces” among adults 55 years and older.
Many older couples who own property qualify for a lower property tax rate under California’s original Proposition 13. At the discretion of each county in California, Proposition 60 and Proposition 90 allow qualifying sellers to carry their Proposition 13 tax base on their original property with them towards the purchase of a new property of equal or lesser value. (Prop 60 governs real estate sales and purchases in the same county; Prop 90 governs real estates sales and purchases between two California counties).
Proposition 13 protects longtime homeowners against escalating property taxes as the value of their property increase. Base year values cannot go up by more than two percent per year, keeping the tax increase at a manageable level. Unless there is a change of ownership, or new construction, the base year value does not change. Unfortunately, this discouraged many people from selling property as their family circumstances changed.
Consider the following example:
Jason, 56, and Julia, 53, want to sell their five bedroom home on a large lot since their children are now grown and have homes of their own. They have lived in their current home for many years. The Proposition 13 base year value of $40,000 from 1975 grew to $66,000 by 2002. Their property tax bill is approximately $700 per year. Their current home assessment value is $400,000. Jason and Julia have found a two-bedroom townhouse for $370,000. But they are unwilling to move because this change of ownership will establish a new tax assessment for the townhouse based primarily on their purchase price, and their tax bill will jump from $700 to approximately $3,700 per year. They are on a fixed income and cannot afford the additional $3,000 per year in taxes.
To resolve this problem, Propositions 60 and 90 permit people over age 55 to sell one home and buy another of equal or lesser value within two years and take the Proposition 13 base value with them. Using the above example, Jason and Julia could move to the townhouse and still pay $700 per year in property taxes (tax rate and fees may make the total bill smaller or larger), plus the future increase of no greater than two percent. There are many requirements to qualify for the tax base transfer, and it can be used only once.
Why is this important in a divorce situation? It can only be used once and it cannot be divided between the spouses. This is the real kicker: family courts do not have this issue on their list of items requiring resolution. In all of my years of practice, I have never heard a judge ask about the tax base transfer.
In recent years, California has seen a sharp increase in gray divorces. Many of these couples are retired or near retirement age. This issue rarely came up in early years since most divorcing couples did not meet the age qualification.
We live in a different world today. What happens if this issue is not resolved or even addressed in your contested, mediated, or Collaborative divorce? The first person to apply for the transfer will get the transfer.
Real Estate Agent Julaine Wagonner of ReMax College Park Realty says often the ex-spouse won’t know his or her ex filed the application first until as late as the end of the year or until they receive their own rejection notice. It can take several months before the county updates the tax records to reflect a reduced/carried over tax base.
This is just one of several financial risks often missed during a divorce. Others include how to allocate any capital gains tax, for example. It is easy for even the most experienced family law attorney to overlook these issues. Confer with a financial professional who can assess your personal circumstances and work with your family law attorney to address and resolve these issues before you sign any judgment or make any requests for orders of the judge related to your real estate. Get the information from the expert to make sure your decisions are as complete as they can be, to set yourself on a path for a successful future.