A slim majority of California residents voted in favor of Proposition 19 on Election Day, green-lighting a motion that gives new property tax breaks to older homeowners while increasing property taxes for those inheriting their parents’ or grandparents’ properties.
The latter is a big deal for the roughly 650,000 Californians who, since 2010, have received a tax break allowing them to maintain their relatives’ low property taxes when they inherit the home. Now, heirs will pay market value in taxes.
On the flip side, the measure may also free up much-needed inventory in the state, as it protects senior homeowners who want to sell their current home and downsize, but have been afraid of much higher taxes. As reported by the Mercury News, Prop 19 also provides some tax benefits to severely disabled residents and homeowners who have had their property ruined by a natural disaster or other catastrophe.
The measure, which was supported by the California Association of Realtors (to the tune of $35.7 million), the National Association of Realtors and California Professional Firefighters, will add up to $2 billion annually to California’s coffers, per data gathered by Yeson19.vote, a pro-Prop 19 website.
“Prop 19 will deliver needed funding for cities, counties, and school districts when they need it most,” according to the site. “It will generate hundreds of millions in annual revenue for fire protection, affordable housing, homeless programs, safe drinking water, and other local services and dedicated revenue for fire districts in rural and urban communities to fix inequities that threaten life-saving response times to wildfires and medical emergencies.” Reported by HousingWire.com
EXPANDED SPECIAL RULES FOR ELIGIBLE HOMEOWNERS
Effective April 1, 2021: Homeowners 55 years of age and older, severely disabled, or whose property was extensively destroyed by wildfire or other natural disasters may be eligible to transfer the taxable value of their primary residence to a replacement primary residence:
Anywhere in California
Of any value, but with upward adjustments if replacement is of greater value
Purchased or newly constructed within two years of sale
Up to three times (previously one time), but without limitation for properties destroyed by fire
For people in these groups, Prop. 19 made three significant changes to the way property taxes are calculated when they sell a principal residence and move into a new primary residence. What are the changes?
Sellers in these groups can now transfer the tax basis of their primary residence to a replacement property anywhere in the State of California. Previously, inter-county transfers were done on a limited basis.
Sellers in these groups can now transfer the tax basis of their sold property to their replacement property regardless of value. Previously, transfers had to be only to properties of equal or lesser value. (some adjustments will be made if the property is of greater value.)
Sellers in these groups may take advantage of this benefit up to three times and victims of wildfires and other natural disasters have no limitations. Previously, sellers could only make use of this transfer one time.
Who qualifies as “severely disabled”?
Per California Revenue and Tax Code Sec. 74.3 any person who has a physical disability or ailment, whether from birth or by reason of accident or disease, that results in a functional limitation as to employment or other activities can likely qualify as “severely disabled”.
When do these tax transfer benefits go into effect?
Beginning April 1, 2021
So, what if I qualify and want to sell my home now; Do I need to wait until April 1, 2021, to purchase another home?
While we believe if either the sale of an existing home or the purchase of a new one occurs after April 1, 2021 the transaction will be eligible for Prop. 19 as long as both transactions were completed within two years of each other, this question still needs to be legally resolved.
If you have already transferred your property tax base once, you must wait until after April 1, 2021 to do so again.
Can I purchase a replacement property before selling my primary residence?
TAXATION OF INHERITED PROPERTY TRANSFERS
Effective February 16, 2021: Prop 19 narrows the rules allowing properties to pass from parent to child and grandparent to grandchild without an increase in the property tax bill. The taxable value can be transferred:
To only those properties used as a primary home or farm by the child or grandchild
If homeowners’ exemption is filed within one year of transfer
If the value of the property is less than $1M over the original tax basis. If the property value, at the time of transfer, is more than $1M over the original tax basis, some upward adjustment in assessed value would occur.
Source: LA County Office of the Assessor
Prop. 19 also takes away some tax benefits for intergenerational family transfers. How does that work?
Under Prop. 19, the only time an intergenerational property transfer is not subject to a tax reassessment is when a primary residence is transferred to a child or grandchild, and that person continues to use the residence as a family home. Even then if the difference between taxable value and actual value is more than $1 million, some upward adjustment on the taxable value will be imposed.
So, if a child inherits a family property but chooses not to use that property as their primary residence, the property’s tax basis will be reassessed?
When do the intergenerational family transfer rules kick in?
Beginning February 16, 2021.
Because every situation is unique, we encourage homeowners to consult with their own tax attorney regarding any questions associated with intergenerational transfers.
If you want advice on how to time your purchases and transfers?
Sellers who want advice on the timing of a sale should consult with a tax advisory prior to selling.
This is a brief summary of the main pillars of Proposition 19
Sources: California Association of Realtors, January 2021