With the confirmed passage of Proposition 19 in California last month, many homeowners are surely wondering whether and how they will be impacted. Here’s a straightforward guide of the key things you need to know and where to find out more.
First, it’s important to remember Proposition 19 is actually made up of 2 provisions: an expansion of tax basis portability for those over the age of 55 plus reforms to intergenerational family transfers. Let’s break those two down one at a time.
Tax Basis Portability
In the 80s, California voters passed Prop 60 and Prop 90 (often referred to together as “60/90”), which enabled homeowners over the age of 55 to transfer their property tax basis to a replacement home under certain conditions. This was a potentially major benefit because of Prop 13 which passed in the 70s, capping the rate property tax can grow to 2%, well below the incredible home appreciation of many areas of California. Prop 13 provided homeowners with a more predictable and affordable property tax payment, but meant they could face a potentially steep new tax bill if considering moving to a new home which would be assessed for tax purposes at the new purchase price.
Props 60/90 addressed this by allowing homeowners over the age of 55 to retain their property tax basis even after moving, but they were limited in several ways, specifically it could only be used once, was only allowed in specific allowed counties, plus it limited the value of the replacement dwelling to be equal or lesser the original residence.
Prop 19 significantly loosens these restrictions in the following ways:
Before Prop 19
After Prop 19
|How many times can you transfer your property tax basis*?||1||3
(no limitation for homes destroyed by fire)
|Where can you transfer your property tax basis to*?||10 specific counties||Anywhere in the state|
|What’s the maximum price of the replacement dwelling*?||Original residence price||No max
(with adjustments if greater in value)
What does this mean for homeowners? When this provision of Prop 19 takes effect next April, if you’re thinking of moving within the state (perhaps out of a higher cost-of-living area like the Bay Area/Silicon Valley) it’s an ideal time to consider taking advantage of these new tax basis portability benefits!
*For full eligibility requirements and timing, we recommend you consult a lawyer or tax professional.
Intergenerational Family Transfers
The second provision of Prop 19 is a lot simpler! Previously homes transferred to children or grandchildren were exempt from property tax reassessment, which led to some notable cases like the “Jeff Bridges” case where an inherited investment property was widely criticized for its shockingly low property tax bills.
On February 16, 2021, this provision of Prop 19 takes effect and will update the rules on these exemptions in multiple ways, but the most important of which is by limiting the property tax reassessment exemption only to the transfer of homes that will be used as primary residences. Secondly, if the difference between the taxable value and the actual value is too great (over $1 million), a partial increase in the new taxable value will be imposed.
What does this mean for homeowners? After this takes effect in February, if you transfer a home you own that’s being taxed below market value to a child who will not be claiming it as their primary residence, the property tax owed on the property will increase based on the current market value of the home. Or if you transfer a home that will be used as a primary residence but is being taxed at a value more than a million dollars less than its actual value, you will also see an increase in property taxes.
Some questions still remain about how individual counties will implement this new provision, but if you are planning to make a family transfer of a home, we strongly recommend consulting a lawyer or tax professional before these changes take effect.