Property Tax Changes Under Prop 19
California’s Prop 19, which narrowly passed last week, was promoted primarily as a way to help disaster victims avoid potentially steep property tax increases after being forced to move. However, it also 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 (i.e. sales price). The original prop 13 passed in 1978 limited the reassessment increase to 2% per year when no ownership change occurs. Over time this has led to wide disparities between the assessed valuations of homes owned for a long period of time vs. their actual market values. 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 for property taxes was exempted.
Prop 19 changes this tax break as follows:
- 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/her primary residence.
- It will apply to transfers made on or after February 16th 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 it’s 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 severely disabled homeowners or seniors aged 55 or older downsizing their homes. Up till now the law allowed them 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 ten specific counties elsewhere in the state. They were allowed two years from the date of sale to purchase the new home. Lastly this exemption could be used only once in their lifetimes.
The new rules are as follows:
- 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 previous ten. 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.