Voters have cast their ballots in favor of Proposition 19 affecting property owners throughout the state of California. While their was some good intent, I believe property owners gave up more than what they gained. The measure addressed two things, transferring property tax basis for homeowners 55 and older and property transfers to children and grandchildren. Here’s what the proposition says….
Note: This proposition was voted yes but not yet confirmed by the state
For Buyers 55 years or older:
SUMMARY – A TAX TRANSFER WITH LESS LIMITATIONS
• Includes people who are 55 years or older, disabled or affected by a natural disaster.
• Could move a property tax base from your previous home to your new home.
• This tax transfer benefit can be used up to three times.
• The replacement home can be located anywhere in the state of California.
• The effective date is April 1, 2021.
What the proposition says (changes are in italics)….
Notwithstanding any other provision of this Constitution or any other law, beginning on and after April 1, 2021, the following shall apply:
(1) Subject to applicable procedures and definitions as provided by statute, an owner of a primary residence who is over 55 years of age, severely disabled, or a victim of a wildfire or natural disaster may transfer the taxable value of their primary residence to a replacement primary residence located anywhere in this state, regardless of the location or value of the replacement primary residence, that is purchased or newly constructed as that person’s principal residence within two years of the sale of the original primary residence.
(2) For purposes of this subdivision:
(A) For any transfer of taxable value to a replacement primary residence of equal or lesser value than the original primary residence, the taxable value of the replacement primary residence shall be deemed to be the taxable value of the original primary residence. (note: this was how it is currently applied under Props 60 and 90).
(B) For any transfer of taxable value to a replacement primary residence of greater value than the original primary residence, the taxable value of the replacement primary residence shall be calculated by adding the difference between the full cash value of the original primary residence and the full cash value of the replacement primary residence to the taxable value of the original primary residence.
(3) An owner of a primary residence who is over 55 years of age or severely disabled shall not be allowed to transfer the taxable value of a primary residence more than three times pursuant to this subdivision.
(4) Any person who seeks to transfer the taxable value of their primary residence pursuant to this subdivision shall file an application with the assessor of the county in which the replacement primary residence is located. The application shall, at minimum, include information comparable to that identified in paragraph (1) of subdivision (f) of Section 69.5 of the Revenue and Taxation Code, as that section read on January 1, 2020.
In short, you still will have an increase in taxable basis – what you are sheltering is the increase in value on your primary residence during the time that you held it. For example, if your home’s tax basis is $400k but it sells for $800k, and then you buy a home for $1.3m, you will be sheltering the $400k from property tax but will be taxed on the basis on the home you are selling plus the increase in purchase price for the upleg property. In this case, your new basis will be $900k instead of $1.3m.
Implications for Inherited Properties
SUMMARY: A TAX INCREASE RELATED TO INHERITED PROPERTIES
• Includes significant restrictions to preferential parent-child/grandparent-grandchild exclusion that allowed parents/grandparents to pass property down with a lower property tax base.
• Upon a parent’s death, the preferential lower property tax base transfers with the property only if (1) it was the parent’s primary home, and (2) it will also be the child’s primary home.
• Grandparents can only pass to grandchildren if the parents are already deceased.
• An inherited property with an assessed value of greater than $1,000,000 will also have a reassessment for the amount over the first million dollars.
• The effective date is February 16, 2021.
In the past, parents or grandparents in CA could transfer primary residential properties to their children or grandchildren without the property’s tax assessment resetting to market value using voter approved Prop 58 or 193. Other types of properties, such as vacation homes and business properties, could also be transferred from parent to child or grandparent to grandchild with the first $1 million exempt from reassessment when transferred.
The ballot measure eliminated the parent-to-child and grandparent-to-grandchild exemption in cases where the child or grandchild does not use the inherited property as their principal residence, such as using a property as a rental house or a second home. When the inherited property is used as the recipient’s principal residence but is sold for $1 million more than the property’s taxable value, an upward adjustment in assessed value would occur. The ballot measure also applied these rules to certain farms. Beginning on February 16, 2023, the $1 million amount would be adjusted each year at a rate equal to the change in the California House Price Index.
My analysis: For the limited number of 55+ home buyers buying up in value, there will be some upside by not having to pay a significant increase in property taxes. Props 60 and 90 currently allow the transfer of the basis to a home up to 110% (depending on how soon after your sale you repurchase), so the benefit is limited in gains. However, I believe the number of these buyers is far less than the number of people that will be passing on real estate assets to their kids or grandkids that will now likely be forced to sell their family’s real estate assets upon inheritance.
