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Review of all things Real Estate: Proposition 19 and how it can save you (and your family) a lot of taxes

 

Last updated 1/11/2023 at 7:07pm



Bob Hillery

CR Properties

As our real estate market is in a quiet phase due to this time of year, I have been looking around for interesting subject matter to report in my weekly article and I came upon Proposition 19. Even though the real estate market isn’t a fast-moving train right now, a friend of mine is utilizing Prop 19 after the passing of her mother so regardless of market activity, it is a salient subject.

I’ll hit the wavetops to create interest, but I am by no means an expert; my recommendation is to speak with the local assessor’s office and your trusted CPA if this article piques your interest.

Passed by the California voters, it took effect after Feb. 15, 2021, and dramatically changes the property tax rules exempting the following: Primary residence transactions for individuals over age 55, severely disabled homeowners, or victims of wildfires or other natural disasters.

The rules for these categories are generally favorable and should result in tax savings for qualifying homeowners by allowing the assessed value of their principal residence to be transferred to a replacement residence in any California county. Unlike the previous rules, this law provides significant benefit even if the replacement residence is more expensive than the principal residence that is being transferred (a significant change from the previous rule).

Prop 19 also revised the Parent-to-Child exemption to limit (1) the types of transfers between parents and children that can be exempted from reassessment, and (2) the property tax benefit available.

First, only the transfer of the parent’s principal residence to the child where the property continues as the principal residence requirement qualifies. Second, provided the transfer meets the primary residence requirement, the child’s assessed value is then determined based on whether the property’s value at the time of transfer is greater than $1 million.

If the value of the property at the time of the transfer exceeds the parent’s assessed value by less than $1 million, then the child takes the parent’s assessed value and tax base. If the value of the property at the time of transfer exceeds the parent’s assessed value by $1 million or more, the child’s assessed value is the current value of the property less $1 million. Given California's real estate values, it is easy to understand how current real estate values could easily exceed the $1 million threshold above Mom and Dad’s purchase price from years/decades ago.

As for the effects on homeowners’ property tax (age 55+, severely disabled homeowners, or victims of wildfires of other national disasters), before Prop 19, homeowners aged 55+ had a one-time benefit to retain their existing assessed property tax base if they sold their home and purchased a home of equal or lesser value within the same county or in one of the nine counties that participated in Props 60/90.

Effective April 1, 2021, homeowners aged 55+, severely disabled homeowners, or victims of wildfires or other natural disasters may receive a property tax benefit when purchasing a more expensive home anywhere in California – and do so up to three times. This is a significant expansion of the benefits of the previous rule.

What then are the big takeaways with Prop 19? Previously there was a one-time tax base transfer possibility in select counties and the new replacement property value had to be equal to or less than the value of the home that was sold. Now all counties in California participate and the replacement property can have a value greater than the former primary residence but keep the lower tax rate.

Previously, transfers between parents and children were capped at $1 million or else there was the penalty of having to pay current market values for property taxation assessment (since property taxes are a function of purchase price/change of ownership value assessment).

The net effect of that was parents who purchased years in the past were essentially held captive to their large homes that they didn’t need any more but, if they sold and downsized the property, taxes of current home values and the tax assessment would be prohibitive. Now, they can utilize tax-based transfers and/or transfers to children to use the home as their primary residence and keep the parents original low tax basis.

Okay, that’s a lot of technical “stuff,” but hopefully the value of Prop 19 has resonated a bit which is important because property taxes in California are real in terms of real dollars, despite our 1% tax rate. Want to learn more? Do your own research on the internet then it’s time to talk with the tax assessor’s office and/ or your trusted CPA.

 

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