Proposal 19, billed as “Changing Property Tax Transfers, Exemptions, and Earnings for Forest Fire Agencies and Counties,” passed with 51.1% approval of California voters in November. As a result, property taxes on residential property will change fundamentally in 2021. There is good news and bad news.
Let me note here that I’m going to simplify the math. Your tax base is the estimated value – the value listed on your property tax bill, on which property tax is calculated. This is usually the fair market value of your home at the time of purchase, adjusted by 1% annually as allowed by Proposition 13 and local taxes and duties. For the following examples, I use the purchase price as the “property tax base”.
The good news
For residents aged 55 and over, the severely disabled, or victims of wildfire or natural disaster, there is a lot to like about Prop. 19. Starting April 1, 2021, these eligible homeowners can sell their homes and take their property tax base with them to any other property they buy for buy the same value or less in the state of California.
Before Prop. 19, if Susie Seventy bought a home for $ 200,000 in 1980 and the property was now valued at $ 1 million, Susie might have resisted the sale even if the house was too big and the stairs too steep. To sell and downsize a smaller $ 500,000 home, Susie would pay more than double the property taxes she paid if she hadn’t moved to a reciprocal county and transferred her property tax base as she moved to the Taxes would be taxed at $ 500,000 tax base instead of $ 200,000 tax base in their current home.
According to Prop. 19, Susie can now sell her home and buy another home for $ 1 million or less and has the same tax base ($ 200,000) anywhere in California. (Cue the applause from real estate agents everywhere, just who advocated this proposal.)
For those 55 years or older or the severely disabled, this property tax base transfer can now be postponed up to three times in your life anywhere in California.
The half good news
Residents over 55 years of age, severely disabled people and victims of forest fires or natural disasters can also benefit from Prop. 19 after April 1, 2021 if they wish to upgrade to a more expensive house.
Suppose Sam Sixty has a beautiful house that he bought for $ 400,000 many years ago, and it’s now worth $ 800,000. But Sam is now divorced, the children have moved out and since he always prefers blondes, he wants to spend more time on the beach. When he finds that classic California beach bungalow for the low price of $ 1.5 million, Prop. 19 still has some perks for him. Its new tax base is $ 400,000 for the first $ 800,000 and the remaining $ 700,000 will be taxed at the normal rate. Sam can transfer the tax base value up to the fair market value of the “old” home to the property tax base of his new home. (Cue more real estate agents cheers.)
The bad news
Those 55+ may love Prop. 19, but their kids won’t like it.
Prior to Prop. 19, parents could transfer their primary residence and $ 1 million (per parent) other property to their children without triggering a revaluation of that property. After February 15, 2021, this exemption will be severely restricted.
From February 16, a transfer of a parent’s primary residence to a child is only exempt from tax if the parent used the property as their primary residence and the child also uses the house as their primary residence immediately after the transfer. No other transfers of ownership between parents and children are excluded from the reassessment, except in the case of the “family farm”, which is so far only vaguely defined but appears to include land that is farmed even if there is no home on that land.
Even the transfers that are deemed exempt from reassessment have limits. The exemption is only valid up to the value determined at the time of transfer plus $ 1 million. Everything beyond that is valued at the normal tax value.
For example, let’s say Ed and Eleanor Eighty have lived in their quaint beach house in Laguna since they bought them in the early 1970s. Your tax base is only $ 80,000, but the house is worth $ 2 million. Before Prop. 19, when Ed and Eleanor died, they could have left their home to their artist son Elijah, who could have moved in to his heart’s content and painted outdoors on the deck or kept the property and rented it out. Either way, he would only be paying what his parents had paid in property taxes, and with an increased income tax base to the value of $ 2 million. Even if he sold the property, he wouldn’t pay any income tax.
Under the new rules of Prop. 19, if Elijah moves into the home within a year and files the homeowner’s property tax exemption, he can exclude $ 80,000 plus $ 1 million from increased property tax assessments, but the remaining $ 920,000 will be taxed on a regular property tax base. That would add up to about $ 9,200 a year more than his parents paid.
If Elijah does not move into the home, the property will be valued at the full value of $ 2 million with property tax exceeding $ 20,000 per year. Let’s hope Elijah can sell these paintings or that he has to sell the beach house. (There is applause again for these real estate agents).
Parents planning to hand over their primary residence or other real estate such as family businesses should seek advice soon.
There are options including using trusts, forming business units to hold the real estate, and lifelong gifts before February 16. However, each of these techniques are very factual and require “running the numbers” to see what makes sense. This is especially true since a lifelong gift of real estate also transfers the income tax base and you may later trade lower property taxes for higher income taxes.
Prop. 19 exists, but it had to be removed in order to maintain the income from property tax. The proposal seeks to “eliminate unfair tax loopholes used by East Coast investors, celebrities, wealthy non-Californians and heirs to trust funds to avoid paying a fair share of property taxes on vacation homes, income properties and beach rentals they own in California.” “(ACA-11 Section 2.1 (a) (2)).
Unfortunately, it likely affects many normal California families as well.
Teresa J. Rhyne is an estate planning and trust management attorney based in Riverside and Paso Robles, CA. She is also the # 1 New York Times bestselling author of The Dog Lived (and So Will I) and Poppy in The Wild, which were released on October 6, 2020. You can reach her at [email protected]