With all the political and social chaos that occurred at the end of 2020, Proposition 19 might have flown under many people’s radars, but it has had a big impact on the California real estate market when it comes to property taxes. Prop 19 replaces many of the elements of Prop 13, which was put in place to keep property taxes low for long-term owners, enabling them to stay in their homes. The good news is that if you’re 55 or older, severely disabled, or lose your home in a natural disaster, Props 13 and 19 allow you to transfer your tax basis from your existing primary residence to another residence. For example, suppose you’ve lived in your home for 30 years and you’re only paying taxes on $250,000 of assessed value, even though the market value of your home is $1 million. With Prop 13, you could sell that home for the market value but still keep the same $250,000 tax basis.
Prop 19 is the same, but it also allows you to buy something more expensive than your existing home and then blend your tax basis. Using the same example I mentioned above, you’d be able to sell your home and purchase a $2 million home. To find out your new tax basis, you’d take the difference between the purchase price and the sales price ($1 million) and add the $250,000, leaving you with a $1.25 million tax basis. That’s a pretty big jump upward, but still quite a bit better than a $2 million tax basis.
Lastly, you can now transfer your tax basis three times anywhere in California, whereas before you could only transfer once and only in certain areas.
So what’s the bad part of Prop 19? Once upon a time, as a principal resident, you were able to transfer title to your kids or grandkids when you passed away and allow them to keep that tax basis. Not only that, but those who inherited the property could use it for whatever they wanted. That’s no longer the case. Now, you can still transfer title to your children or grandchildren, but the house has to be a principal residence for them, and they can exclude your original basis plus $1 million. This will influence whether or not people will want to hold onto family properties.
Now, onto the ugly. Before, if you had a second home or investment property and you passed away, you could pass it on to your child or grandchild and you’d have an exemption of up to $1 million, and the inheritor could continue to use that property as an investment property. Now, however, if you pass on investment property, it will be assessed at its new value and they’ll pay taxes on that new basis. This may create situations where it makes more sense to sell the property than hold onto it.
If you have any other questions about Prop 19 or how it affects you, please feel free to reach out to me. I’d be happy to help you understand the rules and stipulations involved.