Proposition 19, which narrowly passed last month, includes a very complicated change to two current benefits, one involving the transfer of ownership from parents to children, and the other associated with property-tax base portability for seniors changing homes. Here is a brief description of the changes.
First, some background: Excluding remodels, residential and commercial property in California is reassessed either when there is an ownership change or otherwise once annually. Reassessment means changing the valuation on which the owner’s property tax is based. When a property changes hands, its reassessed value is the same as its actual market value (that is, sales price).
The original Proposition 13 passed in 1978, which limited the reassessment increase to 2% per year when no ownership change occurs. Subsequent propositions added exclusions for reassessments when transferring property to children. Under previous law, a primary home’s property-tax base was not reassessed when gifted to, sold to or inherited by a child or grandchild (if the parents are deceased), whether or not the child chose to live in the property or operate it as a rental. When transferring existing rental homes or other commercial property to children, up to $1 million of current assessed value was exempted from property taxes.
Changes to tax law
Proposition 19 changes this tax break in the following ways.
• Only primary homes and farms will quality for an exemption, not rental homes or other commercial property. And only if the child subsequently uses the home or farm as his or her primary residence.
• It will apply to transfers made on or after Feb. 16, 2021.
• The exemption is limited to the current assessed value of the property plus $1 million. If the market value of the property is greater than that, the tax base will be increased by the difference. For example, if the property was assessed at $1 million before the transfer, but its market value at the time of transfer is determined to be $2.5 million, then its new assessed value will be $1 million (the previous valuation) plus $2.5 million minus $2 million (the reassessment exclusion in this example), which equals $1.5 million. Note that some media reports have suggested there is disagreement on this formula, possibly resulting in legislative changes prior to implementation.
The second change applies to downsizing homes. Up until now, the law allowed severely disabled homeowners or seniors age 55 or older to transfer their current tax base to a new primary home of equal or lesser value within their own county or when moving to one of only 10 specific counties elsewhere in the state. They were allowed two years from the date of sale to purchase the new home, and could use this exemption only once in their lifetimes.
The new rules follow:
• As of April 1, 2021, seniors and disabled homeowners will be able to sell their primary residence and transfer the current tax base even if the new home’s market value is higher. In that case, the difference in market value between the old home and new home would be added to the original tax base. Plus, they can move to any county in the state, not just to one of the previously mentioned 10. In addition, this exemption can be used up to three times instead of only once.
• The above benefit is also extended to anyone who loses their home in a declared natural disaster.
According to the San Francisco assessor, the ballot measure is not explicit as to whether just the purchase transaction must be after April 1, 2021, or whether both the old-home sale and new-home purchase must occur after that date. It will be up to the California Legislature to clarify this.
Los Altos resident Artie Green is a Certified Financial Planner and principal at Cognizant Wealth Advisors. For more information, email [email protected] or visit cognizantwealth.com.