In California, homeowners age 55 or older have an opportunity to transfer their existing property taxes to a new primary residence, thanks to Proposition 19, also known as Prop. 19. This blog post will provide a thorough understanding of Prop. 19, its significance, and how it can benefit homeowners in the state.
What is Proposition 19?
Proposition 19 was passed in November 2020 and became effective on February 16, 2021, bringing three vital components into play:
1. Property Tax Transfers for Individuals 55 and Older:
Prop. 19 focuses exclusively on property taxes, distinct from income taxes or capital gains. If you're 55 or older, you can transfer your current low property taxes to a new home.
2. Changes in the Inheritance of Property:
Prop. 19 alters the way property taxes are handled when property is inherited within a family. This change went into effect on February 16, 2021.
3. The Creation of the California Fire Response Fund:
Prop. 19 establishes the California Fire Response Fund, intended to support local fire staffing and emergency response, including CalFire.
Why is Prop. 19 Important?
To comprehend the significance of Prop. 19, let's first look back to 1978 when Proposition 13 limited property tax increases to just 2% per year, based on the property's value at the time of sale. Prop. 19 builds upon the foundation laid by Prop. 60 and Prop. 90, which allowed homeowners aged 55 and older to transfer their tax basis to a property of equal or lesser value within the same or participating counties. However, Prop. 19 takes it a step further, permitting tax basis transfers to any property in any of California's 58 counties. This expansion also extends to those who are severely disabled or victims of natural disasters, such as wildfires.
How to Qualify for Prop. 19?
To qualify for Prop. 19, if you're married, only one owner on record needs to be 55 or older. Both the property you sell and the one you purchase must be considered primary residences according to the tax code. Consulting a tax advisor or expert is recommended to determine if your unique situation qualifies.
Do I Have to Buy or Sell First for Prop. 19?
You can buy your new home or sell your old one first – the order doesn't matter. What's important is that both transactions must be completed within two years of each other. You can take advantage of Prop. 19 up to three times, even if you previously benefited from Prop. 60/90.
Is There a Limit to the Home Price?
No, there is no specific price limit for the home you can buy, but there is a limit to the amount of your tax basis that you can transfer. The amount you can transfer is limited to the value of the home you sell.
Let's illustrate this with two examples:
Example 1:
The homeowner sells their primary residence for $2 million and buys a new home for $1 million. Their current tax basis is $350,000, and they pay about $4,000 annually in property taxes. After transferring their tax basis, they continue to pay $4,000 per year on their new residence, thanks to Prop. 19.
Example 2:
The homeowner purchases a new home for $2.5 million after selling their $2 million primary residence. The county assessor assesses the new home, with $2 million valued at $350,000 and the remaining $500,000 at $850,000. This results in an estimated yearly property tax of approximately $10,200, significantly less than the $30,000 they would pay without Prop. 19.
Now, let's delve into the implications of Prop. 19 on inherited properties:
The Impact of Prop. 19 on Inherited Properties
Before Prop. 19, when real estate was passed down from parents to children or grandparents to grandchildren, there was no reassessment of property taxes. This meant that the taxable value of the property remained the same as of the date of the original owner's death, whether it was the primary residence or an investment property.
However, Prop. 19, effective from February 16, 2021, introduced changes. Any transfer of inherited property on or after this date will be subject to new rules. For investment properties, the assessor's office will reassess them to fair market value, resulting in increased property taxes. There's an exception for the family home or primary residence, which can be protected from substantial tax increases.
How to Protect Your Inherited Property from Tax Increases
To benefit from Prop. 19, there are specific steps to follow:
Move into the Inherited Home: Within one year of the parent's passing, one of the children must move into the home and make it their primary residence. This step is crucial for preserving the taxable value.
Fill Out the Required Forms: Within a year, the child living in the home should fill out either the homeowner's exemption or disabled vet's exemption form, depending on eligibility. Additionally, the intergenerational transfer exclusion claim form should be submitted within three years to secure the benefits of Prop. 19. These forms can be obtained from the local county assessor's office.
Maintain the Primary Residence Status: As long as the child maintains the inherited home as their primary residence, the taxable value remains unchanged. If multiple children inherit the property, only one needs to move in. However, if all children move out, the taxable value may be reassessed at fair market value.
Calculating Taxes on Inherited Prop 19 Property
To illustrate the calculation for property taxes after inheritance, consider the following example:
Taxable Value: $300,000 (including the land and improvements)
Allowance: $1 million (subject to annual adjustments)
If the property value remains at or below $1.3 million, property taxes remain the same. If the value exceeds this amount, taxes will increase.
For instance, if the property value is reassessed at $1.5 million, the difference is $200,000. Adding this to the taxable value results in a new taxable value of $500,000, leading to increased property taxes.
Conclusion
While there is controversy surrounding Prop. 19, it undoubtedly makes it easier for homeowners aged 55 and older in the Bay Area to relocate. As tax laws can change in the future, it's essential to stay informed and seek professional advice if you have questions about Prop. 19. If you're interested in selling and buying a home simultaneously, we offer unique programs and agents savvy in this connect you with and to simplify the process. Thank you for reading this post on Prop. 19. Should you have any questions or would like more information, please feel free to reach out to me. Ryan Nickell (408) 857-5153
