A tax on moving

New York Times:
In California, tax policy has played a significant role in housing price dynamics. Proposition 13, passed in 1978, limited property tax increases to 2 percent a year for owner-occupied homes. But when the house is sold, the property tax assessment is based on the sale price. This means the new owner typically faces a significantly higher property tax bill than the old owner.

Proposition 13 has been called a 'tax on moving.' Indeed it is, since a homeowner in California is much better off remodeling than moving. It is a lot cheaper to add a bedroom to a three-bedroom house than to buy a similar four-bedroom house because of the tax treatment of renovations as compared with new sales. For the same reason, empty-nesters have strong tax incentives to keep their houses, regardless of whether they need all that space.

The result is that fewer houses come on the market than would otherwise be the case, pushing prices up even more for the limited stock of housing that is available.


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