In November 2020, California passed Proposition 19, “The Property Tax Transfers, Exemptions, and Revenue for Wildfire Agencies and Counties Amendment.” This amendment, which goes into effect this year, is good news for some property owners—and bad news for others. So who benefits from California Proposition 19? And who doesn’t?
Who Benefits from California Proposition 19?
For California homeowners who are 55+, severely disabled, or a victim of a wildfire or natural disaster, Proposition 19 is good news. Homeowners in this group can sell their residence and bring their property tax base with them to their new California home as long as that home has a lower or equal value.
What’s key to understanding the benefit of Proposition 19 is the fact that in California, home values used as property tax basis are typically the most recent sales price. In other words, property values aren’t typically reassessed unless a sale takes place.
Let’s say Tim is 56 years old. He bought his home in 1990 for $150,000, and that sum serves as the tax base for his 1% property tax. The home is now worth 500,000. Before Proposition 19, if he sold his home and bought a new one for $350,000, he’d wind up paying more in property taxes each year.
Thanks to Prop. 19, however, as of April 1, 2021, he can now buy a home for as much as $500,000—and still keep the same property tax base as on his old home: $150,000. And he can do that for up to three times in his lifetime anywhere in California!
But what happens if Time buys a home for $650,000? Well, he keeps his old tax base of $150,000 on the first $500,000 value, and the remaining $150,000 will be added to the first $150,000. His total tax base is then $300,000.
Who Doesn’t Benefit?
Prop. 19 makes it more expensive for a child to inherit property from his or her parents. Prior to Prop. 19, parents could transfer $1 million each, as well as their primary residence, to their children without the property values being reassessed.
Starting on February 16, the transfer of property from a parent to a child will only be exempt from reassessment if the property was the principal residence of the parent. Additionally, upon transfer, it will become the primary residence of the child. However, the exemption only applies as far as the assessed property’s value plus $1 million.
For example, Marjory bought her home in 1980 for $100,000. At the time of her death, it’s valued at $1.5 million. Her daughter Sadie inherits the home as her primary residence. She can exclude $1.1 million from increased property tax assessments—but not the remaining $400,000. As a result, Sadie will pay property taxes on a tax base of $500,000.
Get Professional Insights
Parents who plan to leave their primary residences to their children are best advised to consult with a knowledgeable real estate professional to discuss options such as lifetime gifts or trusts. For more information on how to best advise your clients, please contact us at Escrow Hub. We can connect you with resources that can provide more in-depth information.