California Law allows certain owners of real property to transfer their tax basis once a principal residence is sold, to a new replacement property. There are certain exclusions, but overall this is a great benefit for those who qualify.
Lets look at a hypothetical example. For instance, if you have lived in your home for 20 years you have surely acquired a fair amount of appreciation on your property. So if you purchased your home for $75,000 and it is now worth $700,000 you have done quite well. The new owner will now pay annual property taxes in the amount of approximately $8750 per year. Compare this to your current tax bill of say $1000. Now you begin to see why our city and county government love new residents. So much more new revenue to spend!
The benefit to you is that certain counties in California will allow you to transfer your tax base. Typically new taxes are based upon the purchase price of real property, however you can be allowed a one time exclusion. This means you can take your $1000 tax base and apply it to your new residence. As usual certain exclusions do apply and you should check with your tax advisor for your own specific situation.
I like to point out specific instances in which I have been involved, so that you can see how this applies in the "real world". I met with a lady who told me she was interested in selling her house. She intended to take advantage of Proposition 90. She ask, "Suppose I find a house that is a few thousand dollars more than what I sell my house for? Then, I make an agreement with the Seller, to pay them outside of escrow, so that I may take advantage of the tax break. (Prop's 60 & 90, state that you must by an equal or less expensive home) So even though I purchased a more expensive home, it will be reported as less". She then ask me, "Have you ever heard of this"?
I replied, "Yea, I've heard of it, they call it fraud". To which she laughed realizing she had been put in her place, and said, "I guess they do".
This is my cue to exit, stage left, adios amigo. We rufuse to be a part of any unscrupulous activity. If this is your intent, you are on your own. I will do anything as long as it is legal and ethical. End of story.
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