Recently, I received an inquiry from a retired couple living in Ukiah’s El Dorado subdivision. They asked whether they could take their tax basis with them if they downsized to a smaller home in town. Thanks to Proposition 19, the Property Tax Transfers, Exemptions, and Revenue for Wildfire Agencies and Counties Amendment (2020), the answer is yes.
In California, when you purchase a home, the county establishes an assessed value for property tax purposes. Thanks to a 1978 amendment to the California Constitution, annual increases to that value are capped at 2 percent or the percentage growth in the state’s consumer price index, whichever is less. So, the longer you live in a home, the more advantageous your property tax burden is compared to those buying homes at current fair market values.
However, property taxes are not the only consideration when downsizing. Let’s say our retired couple bought their home 30 years ago for $250,000, and the home is now worth $700,000. Let’s also imagine that they refinanced two years ago, opting for an 80 percent loan with a 30-year term and a fixed interest rate of 3 percent. This would give them a $560,000 loan with a monthly payment of $2,360.
Today, if they sold their 2000-square-foot El Dorado house for $700,000 and purchased a 1500-square-foot home on the Westside for $500,000 with 20 percent down, their new loan would be $360,000. If they got an interest rate of 8.125 percent (which is close to the going rate), their monthly payment would be $2,673. That’s $313 more per month than they are currently paying for their larger home.
It may surprise you to learn that downsizing may still be worthwhile. Like property taxes, the monthly mortgage payment is not the only consideration.
By downsizing, the couple may pay a lower premium on their homeowner’s insurance, especially if the insurance company rates their new neighborhood as a lower wildfire risk. The smaller house will presumably require less upkeep and demand a smaller need for utilities and other services. Typically, I estimate that homeowners spend about 3 percent of the value of their home each year for maintenance and upkeep (this does not include utilities). Based on the scenario above, the 1500-square-foot home would require about $6,000 less in annual upkeep—that’s a savings of $500 per month, which more than makes up for the $313 increase in the monthly mortgage payment.
In this case, downsizing would be a wise financial move. Think about it. A smaller house requires less energy to heat and cool, less paint to repaint, less time and material to re-roof, less carpet or wood to replace worn flooring, and a lower landscaping bill for the smaller yard. Plus, as we age, many of us do not have as much energy as we once did. A smaller home can reduce the physical and mental burden of constant upkeep.
So, before you worry too much about rising interest rates, consider all the costs of downsizing—economic, physical, and emotional.
And here’s a quick public service announcement: If you still have the type of smoke and carbon monoxide detectors that require you to change the batteries, this is a good time to do so (that is, unless you enjoy being awakened in the middle of the night by the piercing sound of a low-battery alert). Since it’s wise to change the batteries every six months or so, I recommend doing so when the time changes to and from Daylight Savings.
If you have questions about property management or real estate, please contact me at firstname.lastname@example.org or call (707) 462-4000. If you have an idea for a future column, share it with me and if I use it, I’ll send you a $25 gift certificate to Schat’s Bakery.
Dick Selzer is a real estate broker who has been in the business for more than 45 years.