Proposition 19, passed in November in California, will have a major impact on the housing market and property taxes for homeowners in Livermore real estate and throughout California. For homeowners, especially those over 55, it’s important to understand what this new law will do. There are three main components of Prop 19 and many ramifications to each part:
- Takes away the Parent-Child Exclusion from Reassessment of Property Taxes
- Allows Natural Disaster Victims to Keep Their Tax basis when they replace their home
- Replaces Prop 58 and allows the exchange for any property in California
What follows is a brief summary of the changes taking place now. This information is given as a starting point to help you plan. It is not a complete summary – before you do anything in response to Prop 19, it’s smart to verify the rules with an attorney.
- Parent-Child Exclusion from Reassessment
Under Proposition 13, which passed in 1978, California properties are taxed based on their assessed value (also known as the base year value or taxable value) rather than their fair market value. Assessed value is generally the purchase price and cost of improvements, plus an increase of no more than 2% per year unless and until there is a change in ownership. Proposition 13 will remain the current law even after Prop 19 goes into effect.
I’ll use my mom’s house as an example. She bought it in 1961 for $30,000. When she sold it in 2005, her annual property taxes on the home were about $1,000. The new owners purchased her home for $850,000. Their annual property taxes are about $10,000.
Transfers between spouses are exempted from the change in ownership rule (and thus from property tax reassessment). Proposition 58, which passed in 1986, applies to those age 55 and older and excludes from reassessment transfers between parents and children of the transferor’s (a) primary residence, regardless of value, and (b) $1 million of assessed value of other real property (such as second homes and investment properties).
The parent-child exclusion is most favorable to families that have long-held California real property with low assessed values thanks to Prop 13.
New Rules Under Proposition 19
Proposition 19 replaces Proposition 58 and greatly limits the scope of the parent-child exclusion. Beginning February 16, 2021, (a) the ability to transfer $1 million of assessed value of other property (i.e. property that is not one’s primary residence) is completely eliminated, and (b) the ability to transfer a primary residence between parents and child without reassessment will not apply unless two conditions are met: (i) the primary residence must also become the recipient’s primary residence, and (ii) the fair market value of the primary residence at the time of the transfer cannot exceed the transferor’s assessed value by more than $1 million. If the transferor’s primary residence does not become the recipient’s primary residence (say your son inherits your home and wants to keep it as a rental), then the property will be reassessed to its fair market value.
- Tax Break for Natural Hazard Victims
Proposition 19 addressed the thousands of folks who lost their home to fires or other natural disasters in California in the past few years. It allows them to keep their tax basis when they rebuild or replace their home. Before Prop 19, if your home burned down and you rebuilt basically the same home on the same lot, or moved to a different area, you could face much higher property taxes, a real kick in the shorts for someone who lost their home.
3.Replacing Proposition 58 with Prop 19
Allows for the exchange of any property in California. Again, this applies to persons who are over 55 years of age, disabled, or victims of wildfire or natural disaster. It allows them to transfer their assessed value of their California primary residence to a newly purchased or newly constructed replacement primary residence in any county in California (Prop 58, by comparison, was limited to one’s existing county or a handful of reciprocal counties in California).
My Analysis of Prop 19: Who it helps, who it hurts
If you have property you plan to leave to a child/children, Proposition 19 will likely raise the property taxes on the property you give them, possibly substantially (if the property has increased in value quite a bit). It would be wise to speak to an attorney to see what your options are – in some cases, transferring ownership to them prior to February 16, 2021 could save quite a bit of property tax for years to come.
On the other hand, if you’ve thought about moving (perhaps closer to the grandkids in southern California), Proposition 19 allows you to transfer your property tax basis anywhere in California. For example, let’s say your home is worth $1million now but you only pay $4000/year on property taxes. You can buy a home anywhere in California and transfer your basis – so if you buy a similar home in San Diego for $800,000, your property taxes will still ony be $4,000/year instead of approximately $10,000/year.
Questions or comments? I’d love to hear from you, [email protected]