On the November ballot, California voters passed Proposition 19. This makes changes to property tax benefits for families, seniors, severely disabled persons, and victims of natural disasters in our state. In response, we sat down with Steven Thomas, Pacific Sotheby’s International Realty’s Economist to have questions answered.

General Questions:

1. Who will benefit from Prop 19?

Homeowners over the age of 55, severely disabled residents, and people whose properties have been damaged by wildfires. Family trusts are generally treated the same as individual owners. The measure also creates new funds for firefighters and fire prevention.

2. Does the tax base change when re-assessed, such as due to a refinance?

Prop 19 does not impact refinancing in any way.

3. When will Prop 19 be applicable?

The property tax transfer (portability) provisions take effect beginning April 1, 2021. At that point, seniors/disabled/wildfire survivors will be able to move to any home, anywhere in the state, up to three times.

The intergenerational parent-to-child transfer provisions take effect on February 16, 2021. Prop 19 is not retroactive, so if a transfer happens before that date, the child does not need to live in the home or claim it as a primary residence.

Parents/Grandparents to Children/Grandchildren Transfer Questions:

4. How does Prop 19 change the parent-to-child and grandparent-to-grandchild exemption?

Before Prop 19, in CA parents or grandparents could transfer (gift or sale) their primary residential properties to their children or grandchildren without the property’s tax assessment resetting to market value. 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 re-assessment when transferred.[1]

After Prop 19 passed, it eliminated the parent-to-child and grandparent-to-grandchild exemption in cases where the child or grandchild does not use the inherited (or transferred by gift/sale) property as their principal residence, such as using a property as a rental or a second home.

Also, 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.
*Beginning on February 16, 2023, the $1 million amount would be adjusted each year at a rate equal to the change in the CA House Price Index.[1]

5. If someone does not have kids, could they leave it to a friend who will get the tax basis transfer should they choose to live in the home?

No. That is not true in either current law or under Prop 19. Under Prop 19, the tax base only transfers on an inherited home if the home was the transferor’s principal residence and the child/grandchild will live in it as a primary resident.

6. What if the home is in a trust?

A home being in a trust or not does not change the provisions of Prop 19.

7. What happens to Transferor’s principal property being transferred and the children/ grandchildren do not wish to make it their principal residence?

The exemption for inherited properties will be eliminated going forward for children/grandchildren who do not wish to make the home their principal residence. Starting next year, those properties will be re-assessed at market value when the ownership changes.

8. What happens to rental/vacation properties being transferred to children/grandchildren?

The exemption for inherited vacation and rental properties will be eliminated going forward. Starting next year, those properties will be re-assessed at market value when the ownership changes.

Seniors (55+), those Severely Disabled, & Wildfire Victim Questions:

9. What does Prop 19 mean for 55+?

Before Prop 19‘s passage, older homeowners had a one-time opportunity to retain their existing tax benefits if they moved to a home of equal or lesser value within the same county. They could do the same when moving between LA and nine other counties. If they did not meet those requirements or moved to a more expensive home, they would have had to pay the full amount in property taxes.

Now, older homeowners will receive a property tax benefit when they buy a home anywhere in CA, regardless of purchase price, — up to three times. (Homeowners with disabilities will be able to do the same, and victims of wildfires and other natural disasters will be able to do so if their home is damaged)

10. What does Prop 19 mean for homeowners over 55 with a single property looking to downsize?

They will be able to move anywhere in the state and carry their property tax base if they buy a property of equal or lesser value.

11. Can an older homeowner buy a more expensive property and keep an advantageous assessment?

Yes. Under old rules, families had to downsize to preserve their status. They can now trade up. The new, pricier home will come with a higher assessment, but not at market value. Any amount above the sales price of their prior residence is added to the transferred value.

For example, a long-time homeowner selling a $1 million home with a $200,000 tax assessment wants to move into a $1.5 million home closer to their grandchildren. They will see a higher tax bill, but the new assessment will be based on the difference between the condo purchase price and the sale price of their old home ($500,000), plus their original assessment ($200,000) for a new tax base of $700,000.

12. What if a person buys a home and closes on that home before April 1st, however does not transfer residence until after April 1st, can they still use Prop 19 on the new residence?

Regarding portability that goes into effect April 1, 2021, under current law, that person has two years from the date of the sale of the original home to purchase a new home. Prop 19 does not change that. However, there is additional paperwork that seniors/disabled/wildfire survivors will have to complete to transfer the tax base.

Sources:

  • CAR
  • CA State Board of Equalization
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