California’s Prop. 19: Key things the new property tax law gives and takes awayadmin
By TERESA J RHYNE | TR Law GroupPUBLISHED: December 13, 2020 at 5:00 a.m.
Proposition 19, billed as “The Property Tax Transfers, Exemptions, and Revenue for Wildfire Agencies and Counties Amendment,” passed with 51.1% of California voter approval in November. As a result, 2021 will see sweeping changes in property taxes assessed on personal residences. There’s good and bad news.
Let me note here that I’m going to simplify the math. Your tax base is the assessed value — the value listed on your property tax bill on which the property tax is calculated. It is typically the fair market value of your home at the time you bought it, adjusted annually by up to the 2% allowed under Proposition 13. The property tax rate is 1% plus other voter-approved fees and assessments. For the examples below, I’m using the purchase price as the “property tax base,” and a 1% tax rate.
The Good News
For residents age 55 and older, severely disabled, or a victim of a wildfire or natural disaster, there is much to like about Prop. 19. Effective April 1, 2021, those eligible homeowners can sell their homes and take their property tax base with them to any other property they buy for the same value or less in the state of California.
Before Prop. 19, if Susie Seventy bought a home in 1980 for $200,000 and the property was now worth $1 million, Susie may have resisted selling even if the house was too large and the stairs were too steep. To sell and downsize to a smaller home worth $500,000, unless she moved to a county with reciprocity and could transfer her property tax basis, Susie would wind up paying more than twice the property taxes she was paying, as she’d be taxed on the $500,000 tax base rather the $200,000 base in her current home.
Under Prop. 19, Susie is now free to sell her home and buy another home valued at $1 million or less and have her same tax base ($200,000) — anywhere in California. (Cue the cheers of real estate agents everywhere, which is precisely who championed this proposition.)
For people age 55 and older or severely disabled, this property tax base transfer can now be moved up to three times in your life anywhere in California.
The Semi-Good News
Residents over age 55, the severely disabled, and wildfire or natural disaster victims can also benefit from Prop. 19 after April 1, 2021, if they’re looking to upgrade to a more expensive home.
Say that Sam Sixty has a nice home he bought for $400,000 many years ago, and it’s now worth $800,000. But Sam’s now divorced, the kids have moved out and since he’s always preferred blondes, he’s looking to spend more time at the beach. When he finds that classic California beach bungalow for the low, low price of $1.5 million, Prop. 19 still has some advantages for him. His new tax base will be $400,000 on the first $800,000 of value, with the remaining $700,000 taxed at the normal rate. Sam can carry over the tax base value up to the fair market value of the “old” home to the property tax base of his new home. (Cue more real estate agent cheers.)
The Bad News
The 55 and over set may love Prop. 19, but their children aren’t going to like it.
Before Prop. 19, parents could transfer their primary residence and $1 million (per parent) of other property to their children without triggering a reassessment of those properties. After Feb. 15, 2021, that exemption is severely curtailed.
Beginning Feb. 16, a transfer of a principal residence by a parent to a child is only exempt if the parent was using the property as their principal residence and the child will also be using the home as their principal residence immediately following the transfer. No other transfers of property between parents and children will be exempt from reassessment, except in the case of “family farm,” which is thus far only vaguely defined but appears to include land farmed even if there is no home on such land.
Even those transfers qualifying as exempt from reassessment have limits. The exemption will only apply as far as the assessed value at the time of the transfer plus $1 million. Anything above that will be assessed at the normal tax value.
Assume Ed and Eleanor Eighty have lived in their quaint Laguna beach home since they bought it in the early 1970s. Their tax base is a mere $80,000, but the home is valued at $2 million. Prior to Prop. 19, when Ed and Eleanor passed on, they could have left their home to their artist son Elijah who could have moved in and painted en plein air on the deck to his heart’s content or kept the property and rented it out. Either way, he’d pay only what his parents paid in property taxes, and with a stepped-up income tax basis at the $2 million value, so even if he sold the property, he’d pay no income tax.
Under Prop. 19’s new rules, if Elijah moves into the home and files the homeowner’s property tax exemption within one year, he will be able to exclude $80,000 plus $1 million from increased property tax assessments, but the remaining $920,000 will be taxed at the regular property tax base. This would result in roughly $9,200 a year more than his parents were paying.
If Elijah does not move into the home, the property will be assessed at the full $2 million value, with the property tax bill then exceeding $20,000 a year. Let’s hope Elijah can sell those paintings, or he just might have to sell the beach house. (There are those real estate agent cheers again).
Parents looking to pass their principal residences or other property, such as family business property, would do well to seek advice soon.
There are options, including the use of trusts, forming business entities to hold the properties, and lifetime gifts before Feb. 16th but each of these techniques is very fact-specific and requires a “running of the numbers” to see what makes sense. This is particularly true since a lifetime gift of property transfers the income tax basis as well, and you may be trading lower property taxes for higher income taxes down the road.
Prop. 19 giveth, but it had to taketh away to keep those property tax revenues coming in. The proposition was said to eliminate “unfair tax loopholes used by East Coast investors, celebrities, wealthy non-California residents and trust fund heirs to avoid paying a fair share of property taxes on vacation homes, income properties, and beachfront rentals they own in California.” (ACA-11 Section 2.1(a)(2)).
Alas, it likely affects many normal California families as well.
Editor’s note: This post has been updated to reflect the maximum annual tax rate for property under Prop. 13.