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Buyers of homes with deep value cuts will reap tax advantages for years to come

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POSTED February 19, 2010 1:59 a.m.
Call it the Darwin Proposition 13 effect.

A home that sold for $413,000 in early 2006 is typically selling for about $178,000 today.

Not only are the buyers getting more home for the dollar but they are getting a long-term tax break that will put them in a better position than a homeowner who bought a similar home in 2006 and holds on to it.

Property taxes are typically one percent of the valuation in most cases.

That means the property tax paid for the house that resold went from $4,130 a year in 2006 to $1,780 when it closed escrow today.

At the same time, someone staying put may get their property taxes roiled back from $4,130 to $1,780 a year depending upon the value of similar homes when the reassessment was made on Jan. 1, 2009.

The odds are that the home was probably worth more on that date when the law requires assessment to be set – as values were still on the way down. For the sake of argument say the person who stayed put had their house reassessed at $210,000 based on Jan. 1, 2009 values. That means their tax bill for 2010 would be $2,100 compared to the buyer of the foreclosed home of similar value who would be paying $1,780 based on sales price.

Assume on Jan. 1, 2010 the value was at $1,780 for both homes. That means the 2011 tax bill for the home with the same owner since 2006 would decline to $1,780.

A big difference comes when the market starts gaining value.

If values go up 2 percent a year, both homes would increase their tax bill by $17.80 a year. But once gains exceed 2 percent, the foreclosed home that was purchased won’t have its official valuation for tax purposes increase beyond 2 percent. Those who stayed put since 2006 would see their property tax bill mirror whatever the market value jumped as their base year is still 2006 and not 2010. So if values go up 5 percent, so will their tax bill until it catches up with their base year plus annual increases capped at 2 percent.

The home bought in 2010 with a base year price of $178,000 can never go up by more than two percent a year.

So the buyer of the home will pay taxes reflecting 1998 values – the previous time the house value was at $178,000 - while the buyer of a similar home who bought in 2006 and stayed put will have the base value for taxes always $132,000 higher than the buyer of the foreclosed home under Proposition 13 rules.

Even if values shot back up 57 percent in one year to regain all of it lost value the foreclosed home would gain in value just two percent for property tax purposes.

It is why Realtors such as Tom Wilson are calling the tax advantages of buying today in terms of property taxes a long-term advantage in terms of housing affordability.
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