Proposition 8 – What Is It, and Should I Sell My House?

Sometime last year several California Real Estate markets bounced off the bottom and started back upward.  All of the talk about “Shadow Inventory” and future foreclosures didn’t stop buyers.  So what does this have to do with Proposition 8?  Wasn’t that the gay marriage proposition?

Well, it was, but even before that Proposition 8, there was another Proposition 8.  Lets’ call this one the balancing act that passed when California famously revolted against then Governor Browns spending policies and tried to limit his ability to spend by limiting his ability to collect taxes with Proposition 13.  For those of you that are new to California, Governor Brown was also the Governor in the 70’s when Proposition 13 and Proposition 8 passed.Avoid Foreclosure Headaches Like This Hot Tub

The more famous Proposition 13 set the standard by which a property could be taxed in California.  The short course on Proposition 13 is that 1% of whatever you pay for a house plus 1% of the improvements or major remodeling will be your tax bill.  Tax assessors are limited to raising your assessment to 2% per year.  The maximum your bill could go up is 2% of 1% of what you paid for and improved upon your property.  Sounds fair enough doesn’t it.  No big surprises after you move in.

Since property values skyrocketed across California and houses were selling on average every 5 years, Proposition 13’s limits weren’t really hurting many cities.  The cities just continued to spend at will, increasing budgets as property tax receipts went up with the real estate markets.

Then comes the 2006-2008 bursting of the mortgage bubble.  From 2008 to 2011, home prices fell as much at 60% in some areas.  A little paragraph in Proposition 13 helped homeowners as they watched their property value spiral downward by reducing their assessment to current market values.  If you paid $300,000 and your house was now worth $100,000, then your tax bill became 1% of $100,000.  You might still be underwater on your mortgage, but at least the taxes were fair.  That also meant the city was losing up to 60% of the income it derived from the taxes on those houses.  Since most cities spent every penny they took in, many were quickly in trouble.

Now comes the 2011-2012 year in the real estate market.  The wholesaling of foreclosures at rock bottom prices starts to slow and values start creeping back up.  Many homeowners where shocked this spring when they opened their tax bills, and even more will be shocked this fall.  Proposition 8 allows the county assessor to reassess property tax values back up as fast as the market moves.   As fast as some peoples bills came down, so they will go back up.  If you are renting, this could mean your rent is going back up.  Don’t think the county supervisors and city councils are going to let the assessor’s delay raising rates when you can’t argue with them about it.  They sure aren’t going to cut the budget and have people yelling at them all day if they can just raise your taxes according to the law.

So how do you avoid the Prop 8 tax hike?  The answer is simple, move.  Lets say you have been dreaming of a waterfront home like the one I have listed for sale here.  Several years ago it might have cost 30-50% more to buy the same house.  If you buy it today, Proposition 13 protects you at the lower price you actually pay when you buy this house.  If you sell your current home, then you avoid the Proposition 8 bounce back effect and your buyer saves too.  Now there is a win – win.

Many people are waiting for the market to “recover” before they move up.  If you want to lock in the most savings, now might be the right time for you to consider a move.  Record low interest rates are available and locking in low prices can save you a lot of money in taxes over the years to come.  Do you want to live with Proposition 8 until the market “recovers” or Proposition 13? It is your choice.

Kurt DeMeire is a California Real Estate Broker and the owner of County Records Research, a service to help buyers and investors find great deals on Foreclosure and Short Sale Properties.

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