"Or you can stay and enjoy your new-found wealth."
In most places, if your $200,000 house now has a value of $1 million, you cannot stay since property taxes will increase. So, you can sell and leave, but staying is often not an option particularly for people on a fixed income.
In California we have this absurd voter-approved law we call Proposition 13, which caps property rates. It effectively eliminates the only "wealth tax" we have, leaving our schools perineally underfunded and removing incentives to upzoning from both city governments and home-owners! It's a real piece of work.
So, the rate is capped, but what does that mean if the value of the property goes up? Let's say the tax assessment went from $200,000 to $1 million, how much would the yearly payment go up?
// it is a bit off-putting to down vote everyone not up on CA law.
The tax basis value can only increase 2% per year, except when certain qualifying events (transfers of ownership, mostly, but IIRC some improvements qualify, at least as to the value added by the improvement, as well.)
So, given the prop 13 maximum tax rate of 1% and maximum increase in tax basis value of 2% per annum, a property that was fully taxed at a basis value of $200,000 in 1985($2,000 annual tax) that increases in value to $1 million -- or even $10 million -- in 2015 would have a tax basis value of $362,272 and a total annual property tax bill of about $3,623.
Prop 13 causes all sorts of issues. Many people want to move (kids moved out, changed jobs, etc.) but they can't because they would not be able to afford the huge jump in property taxes.
It's just another thing that creates artificial scarcity.
The people who want to move but can't afford to are the exact same people who would be forced to move without prop 13. At least with prop 13, people are not forced out of the homes they have purchased.
The problem is not with Prop 13. It's with property taxes at all. I'm not fundamentally against a wealth tax of some kind, or against cities raising income, but if you base this on assessed values of real-estate, a highly illiquid asset for most people, you are guaranteed to generate these problems, not to mention undermining the very notion of property.
The problem is not prop 13. It is that something else should be taxed instead of property.
> In most places, if your $200,000 house now has a value of $1 million, you cannot stay since property taxes will increase.
Property taxes in the US typically vary between 0.5% and 1% of market value; even in the absence of Prop 13 style limits on increases, that means an increase of property tax of between $4,000 ($1,000 to $5,000) and $8,000 ($2,000 to $10,000) per annum, and, regardless of rate, represents about a 5.5% annual increase in value (and, thus, tax costs for ad valorem taxes.)
With the posited increase having increased over ~30 years (GP's scenario had a house purchased in the 1980s), that's only about double the rate of inflation, so even with no increase in real income over the time, you'd have to have been fairly tight initially to be priced out of the home by tax increases.
This is quite the ivory tower view (one I must admit that I'm privileged to share with most other tech workers). The median income of a California resident is about $29k. In a dual income household property taxes rising to 10k a year would be a pretty big deal. Particularly for those living paycheck to paycheck.
> The median income of a California resident is about $29k.
The median income California resident (even a dual-income household of such residents) is unlikely to have had a $200,000 home in the 1980s, or, if they managed it, to have its property value increase to $1 million in the intervening 30 years while remaining a median income California resident.
Heck, by a common guideline (reasonable house price = 2.5 times annual household income), a dual-median-income family at the current median level can't afford a $200,000 house today.
They weren't in a $200,000 house. They aren't in a million dollar house. That doesn't mean that a similar 5x increase in their property taxes would be affordable, but the 10k doesn't apply.
8k for someone on a fixed income is a must move. An example of this is the boom in western ND with rents going up $600 - $800 month which forced an issue with a lot of elderly people on fixed incomes.
Tax-duductible doesn't cover it for fixed income folks.
Seriously people why the downvotes for these guys not being up on California law? Also, this particular post specifically calls out "In most places". In most places this IS in fact true. Feel free to reply and let him know that California has a special law in place that makes this possible, but nothing he said is worthy of a downvote.
In many places property tax can increase after you purchase a property without California-style Constitutionally-imposed limits; there's very little evidence that this actually makes it reasonably likely for anyone to actually be priced out of property due to value increases in other-than-highly-unusual circumstances.
In most places, if your $200,000 house now has a value of $1 million, you cannot stay since property taxes will increase. So, you can sell and leave, but staying is often not an option particularly for people on a fixed income.