No matter what your political affiliation there’s one thing we can all agree on regarding the recent elections: We are grateful that they are over. Our TV’s are no longer inundated with commercials for a slew of new propositions.
One of the most opaque of these propositions was proposition 19 which, you may know, has something to do with real estate. The proposition narrowly passed (with 51% of the vote) and although it will take a little time for the exact language to be refined here is a brief overview of what proposition 19 does and why this is a good thing for many, but not all, California homeowners.
The new law takes effect February 15, 2021
Proposition 19 primarily effects homeowners who are 55 and older, disabled homeowners, and those who have had a home destroyed by a natural disaster. It allows them to transfer their primary residence’s tax base value to a replacement residence. That residence can be of any value, located anywhere in the state. We will unpack that statement a little later but here is the exact language of the proposition;
- allow eligible homeowners to transfer their tax assessments anywhere within the state and allow tax assessments to be transferred to a more expensive home with an upward adjustment;
- increase the number of times that persons over 55 years old or with severe disabilities can transfer their tax assessments from one to three
- require that inherited homes that are not used as principal residences, such as second homes or rentals, be reassessed at market value when transferred
- allocate additional revenue or net savings resulting from the ballot measure to wildfire agencies and counties.
The takeaway
The main takeaway from all of this is that now parents or grandparents can transfer primary residential properties to their children or grandchildren without the property’s tax assessment resetting to market value. For example; if your parents bought a home in 1980 for $100,000 and they pass it on to you the tax liability is no longer based on that $100,000 but on today’s market value. You can imagine that, for house that was bought 40 years ago, that difference will be substantial: California Median home price in 1980: $167,300–in 2000: $211,500
In a newsletter sent out last week County Assessor Jeffrey Prang said “Under current law, known as Prop. 58 and Prop. 193, children (and in some cases grandchildren) may inherit their parents or grandparents’ property tax assessment. This applies to primary residences of any value and up to $1 million in additional property (commercial or residential).”
Prop 19 makes it easier to maintain wealth within a family, especially for the less affluent families who may be unable to shoulder the burden of higher property taxes once a home is bequeathed.
Assessor Jeffrey Prang again; “Prop. 19 restricts the inheritance of a property’s assessed value to the primary residence with a maximum transfer value of $2 million, depending on the circumstances. Prior to a transfer, the home must be the parent’s principal residence and it must become the primary residence of the children/child within one year after the transfer to qualify.
This last sentence is the crux of the matter…see below.
If you’ve been keeping up with California propositions this all may sound rather familiar
Ever since 1978 when Prop 13 passed, California has had property taxes that favor longtime homeowners. Similar to Prop 19 Prop 13 allows owners to pay property taxes based on their original purchase price no matter how much their home goes up in value. When children inherit the home, under Prop 13, they inherit their parent’s favorable tax rate.
The difference is that Prop 19 only allows this favorable tax rate when children move into the home as their primary residence within a year of inheriting the property. It all but prevents children from using their parent’s home as an income or rental property.
Prop 19 also prevents parents and grandparents from handing down vacation homes at favorable tax rates.
As you can see whether Prop 19 is a plus or a minus depends almost entirely upon what you intend to do with the inherited property. It can get quite tricky, especially if you don’t fall squarely into either of these categories. As always it is a good idea to speak with your realtor about the tax ramifications of any property transfer. Since the passage of Prop 19 that includes inherited properties in particular.
