In November, Proposition 19, the California property tax initiative, was on the ballot and passed by the state’s voters after a similar 2018 measure failed to garner support. Prop 19 includes two provisions that impact property tax exemptions, the first deals with the portability of a homeowner’s property tax basis and the second provides new rules on intergenerational transfers of property.
Before diving into the details of each provision, the Dawn Thomas Team wants to reiterate that it is always best to consult your professional tax preparer, Certified Public Accountant (CPA) or tax lawyer for insight into how Proposition 19 impacts your individual financial situation.
History of Property Tax & Propositions 13, 60 & 90
In 1978, Proposition 13 was passed into law in California. Rather than having real property value reassessed to current market value every year, this initiative enacted property reassessment only when there was a change of ownership. Otherwise, the property could only increase in taxable value by 2% a year (plus the value of any new construction). For over forty years, Prop 13 has kept property taxes lower on family homes than in many other states, especially for those who retained ownership for decades.
The issue that eventually arose was that these low taxes were keeping older homeowners from being able to move and downsize because the property taxes of a replacement residence were prohibitive.
Propositions 60 and 90 were designed to help assuage that by allowing property tax portability to homeowners who met certain requirements and purchased a replacement home within the same county (Prop 60) or between certain participating counties in the state (Prop 90). This transfer could be used only once per qualifying homeowner and the value of the new home had to be of equal or lesser value than the sale price of the original residence.
Though these initiatives helped, it still limited the ability of homeowners to buy property only in participating counties and only allowed a transfer once per eligible homeowner.
The mission of Proposition 19 is twofold: to reduce the restrictions on homeowners selling their family home and buying a new primary residence elsewhere in the state and to tighten restrictions on property transfers within families.
Provision 1: Tax Basis Portability
Proposition 19 expands the ability of those 55 years or older, individuals who are severely disabled, and homeowners whose home has been severely damaged or destroyed in a wildfire or other natural disaster. These qualifying individuals can now transfer the taxable value of their primary residence to:
- A replacement property that will serve as a primary residence
- Anywhere in the state of California
- Within two years of the sale of the original primary residence
- Regardless of the value of the replacement residence (there are adjustments for those “greater” in market value)
- Up to three times per qualifying homeowner (but without limitation for those whose home were destroyed by wildfire)
An eligible homeowner can purchase a replacement residence before selling their existing home and claim the tax benefits, again as long as both transactions take place within two year of one another. This is the current rule under both Proposition 60 and 90 and remains in effect under proposition 19.
The new property tax transfer rules laid out under Proposition 19 go into effect on April 1, 2021.
There is some confusion as to whether the benefits of Prop 19 transactions of either the sale or purchase of a primary residence occurs prior to the April 1, 2021 date. The California Association of Realtors® (CAR) believes that, as long as one of those subsequent transactions takes place after the April 1, 2021 date, Proposition 19 tax rules apply. Others believe that both the sale and purchase must occur after April 1, 2021. CAR is working to get full clarification.
Until this date, both Propositions 60 and 90 remain in effect and homeowners can still take advantage of this transferability of their tax basis as long as they haven’t used it on a prior transaction.
For replacement residences that are of equal or lesser value, the tax basis of the original principal residence transfers to the new home if it is purchased within two years of the sale. The property tax basis is subject to an inflationary index of 105% is applied on homes within one year and 110% for those purchased within the two-year timeframe.
For replacement homes of greater value, the taxable value is determined using the current home’s taxable value, its sale price, and the purchase price of the replacement property.
CAR uses the following example:
Original Primary Residence (OPR) taxable value: $400,000
Original Primary Residence Sale Price: $900,000
Replacement Primary Residence Purchase Price $1,000,000
RPP Purchase Price ( $1,000,000) minus OPR Sale Price ($900,000) = $100,000
Taxable value of RPP: $400,000 + $100,000 = $500,000
For homeowners who have taken advantage of Prop 60 or 90, they will be eligible to transfer their property tax basis again after the April 1, 2021 deadline when Proposition 19 goes into effect.
For qualifying homeowners who have already sold an existing home or purchased a new home, but have not yet completed the secondary transaction, it is believed that the tax benefits outlined in Proposition 19 will apply if that transaction takes place after the April 1st date and within two years of the initial sale or purchase.
Provision 2: New Rules Regarding Intergenerational Family Transfers and Family Farms
As of 1978, Proposition 13 also allowed a home’s property tax basis to be transferred when the property was conveyed to a child or grandchild through sale, gift, or inheritance. Currently, this ownership transfer of property does not trigger reassessment regardless of its current market value or how the property is being used (i.e. as rental or income property).
In addition to the ability to transfer a primary residence and its tax basis to children, under Proposition 13, each parent can also transfer “other property”, such as a vacation home, rental, or commercial property. These additional properties can be exempted up to $1 million in assessed value.
After February 15, 2021, Proposition 19 changes these family transfer rules. The revisions include:
- Abolishing the exemption of “other property”
- Preserves the exemption on transfer of primary home but only if the child also uses it as their primary residence/family home
- The property tax basis can be transferred only if the difference between the assessed value and the market value of the transferred home doesn’t exceed $1 million
- If it breaches the $1 million mark, a partial reassessment will occur, but it will not be assessed to current market value unless the property is not being used as the child’s primary dwelling
Family farms have the same exemptions as principal residences. They are defined as property being used for grazing, pasture, or to actively produce an agricultural commodity. Unlike a family home, the owner is not required to live on said property as their primary residence.
For the tax benefits of Proposition 19 to take effect after the transfer of property from a family member, the new owner must:
- Live in the home as their primary dwelling
- Claim the homeowner exemption or disabled veteran’s exemption within one year of the transfer
No longer will inherited or transferred primary homes be allowed to receive a property tax benefit if used as rental or income property as was possible under Proposition 13.
Proposition 19 is not retroactive, and as such, will not apply to any property that was transferred from parent to child or grandparent to grandchild prior to February 15, 2021.
Proposition 19 may or may not affect real property placed in a trust. A San Francisco Chronicle article offers some insight into this, but again, we encourage you to work directly with your estate attorney and other important advisors for expert counsel on how Proposition 19 may influence your individual situation.
Proposition 19 is phased into law in two stages. The new rules for the transfer of property within families takes places as of February 15, 2021. April 1, 2021 is the date that the expanded property tax basis rules take effect for eligible homeowners who are selling a primary residence and purchasing a replacement home.