Today’s post is written by Donna Hunnicutt, Market Manager for Orange County.
With the arrival of a hopefully much brighter year of 2021, some California homeowners will be ushering in some newly passed property tax propositions as well as the New Year. Proposition 19, aka “The Property Tax Transfers, Exemptions, and Revenue for Wildfire Agencies and Counties Amendment” will be implemented into law starting February 16, 2021. Here we will review the basics of how Prop. 19 will affect 55+ homeowners, and family transfers of property.
There are several distinct provisions of Prop. 19 which will alter Propositions 58, 60, 90, 193, and 13, and which will significantly affect, both positively and negatively, how property taxes are levied on homeowners aged 55 and above when they purchase a new home, or when they transfer a property to children or grandchildren.
Prop. 19 was presented as a way to increase funds for firefighters and wildfire containment programs and to “eliminate unfair tax loopholes used by East Coast investors, celebrities, wealthy non-California residents, and trust fund heirs…” Yet the nitty-gritty details of the legislation shows that Prop. 19 will also eliminate property tax protections for many “normal” California property owners.
Let’s first look at some of the more positive aspects of Prop. 19, which will kick into effect on April 1, 2021. For homeowners who are age 55+, severely disabled, or victims of a natural disaster or wildfire, Prop 19 will allow them to sell their homes and transfer their property tax base to any property anywhere in California, within two years, whether the value is the same or more than the current home.
How does this differ from the existing property tax transfer rules for 55+ homeowners?
- The move can be to any county within California, versus only certain counties
- The new purchase can be of greater value than the original residence
- Such a transfer can occur three times, instead of just once
However, if the new residence is higher in price than the original residence, the difference in value will be calculated, and only the portion reflecting the original residence will retain the property tax basis, with the differential value added on. (Example: Seller has a property tax basis of $250,00. He sells for $700,000, and purchases a replacement home for $800,000. There is a $100,000 price difference, which is added onto his $250,000 property tax basis= $350,000 is his new property tax basis for the replacement property.)
Another significant and less positive provision of Prop. 19 deals with intrafamily property transfers and will likely be seen as a negative consequence to the passing of this legislation. Under current law, a parent can transfer a primary residence, a secondary residence, or rental property to a child or grandchild with no change in property tax basis if the assessed value is less than $1 million, regardless if it will be used as a primary residence. A primary residence is currently protected in an unlimited amount from reassessment, with further protection on other properties up to $1 million in assessed value.
Under Prop. 19, several key criteria will trigger a reassessment of property values when transferred by parents to their heirs. Only transfers meeting these criteria will not be considered a “change of ownership” and not subject to new calculations for property taxes:
- The property must be the parent’s principal residence.
- After the transfer to a child or family member, this heir must use the property as their primary residence.
- The child or heir’s assessed value will remain at the parents assessed value, if the difference between the original tax basis and the value at time of transfer is not more than $1 million; if the value is over $1 million over the original tax basis, the new tax basis will be the value of the property at the time of transfer minus $1 million. (Example: parent’s original tax basis= $500,000, and property is valued at $2M at time of transfer, the new taxable value would be $1 million=$2M – $1M)
The fallout from Prop. 19 appears to be that children/family members inheriting properties in California after February 16, 2021, will most likely be hit by large property tax increases on homes valued over the $1 million threshold. It would be prudent for any families who might be negatively affected by this legislation, to confer with their estate planning professionals to determine how to handle these significant changes in property transfers.