If you’re like most, the thought of moving dredges up distasteful prospect of your property taxes increasing. If your share this uneasy feeling, we have a new proposition for you—19.
Most homeowner’s are keenly aware that buying a new home means having their property tax base increased to a minimum of 1% of the new purchase price. For those of you who have owned a home for many years this alone can make a move financially impossible; for many, it means they couldn’t afford to buy the home they already own.
Remember all of those propositions on the November ballot? Number 19 won, and might prove to be your winning number as well…
Some background
Prop. 13 set initial tax assessments on property values beginning in 1978.
Ad valorem property taxes are currently limited to one percent of a property’s assessed value, plus any voter-approved local taxes such as school or library bonds. Annual increases are limited thereafter to a two percent increase on the property’s compounded value a year.
When a home is sold, the property is reassessed at its current market value. The market value of most properties grows faster than two percent per year, leaving many properties taxed at a value below market price.
Prop 19 allows a homeowner who is 55 years of age or older, severely disabled or whose home has been substantially damaged by wildfire or natural disaster to transfer the taxable value of their primary residence to: a) a replacement primary residence anywhere in the state, b) regardless of the value of the replacement primary residence (but with adjustments if replacement has a greater value), c) within two years of the sale and d) up to three times (or as often as needed for those whose houses were destroyed by fire).
The prior rule limited this exemption to a one-time transfer within the same county (Prop 60) or between certain counties (Prop 90) and only if the replacement property was of “equal or lesser value.”
When did the tax basis portability portion of Prop 19 take effect?
April 1, 2021
If the replacement property is of equal or lesser value, does the tax basis of the replacement property change?
No. The taxable value of the original property may be transferred and become the taxable value of the new one.
If the replacement property is of greater value, how is the new taxable value calculated?
The new taxable value is calculated by adding the difference between the full cash value of the replacement property and the original property to the original taxable value. For example, if a seller of an original property has a $300,000 taxable value and a full cash value of $1M and then buys a replacement property for $1.5M, the taxable value of the replacement property would be $800,000—not the seller’s original tax base, but not tax on the full $1,500,000 upgrade either.
Can a replacement property be purchased prior to the original primary residence being sold?
Yes. This is how the current rule under Prop 60 works, and Prop 19 uses nearly identical language.
How does Prop 19 affect the rules on intergenerational transfers to children or grandchildren?
It limits the exemption to those properties where the primary residence continues to be used as a family home by the child or grandchild transferee. If so, the taxable value will remain the same, subject to some upward adjustments if the property value, at the time of transfer, is more than $1M over the original tax basis.
If the property is more than $1M over the original tax basis, what is the new taxable basis?
The new taxable basis will be the assessed value of the property at time of transfer minus $1M.
Not all changes are cast in stone. This could very well be repealed or altered in a less favorable way. If you’ve been contemplating a move, contact us so that we may answer any questions you may have and help you move along to your new home.
Disclaimer:
Drew & Christine Morgan are REALTORS/NOTARY PUBLIC in Belmont, CA. with more than 30 years experience in helping sellers and buyers in their community. They may be reached at (650) 508.1441.
The information contained in this article is educational and intended for informational purposes only. It does not constitute real estate, tax or legal advice, nor does it substitute for advice specific to your situation. Always consult an appropriate professional familiar with your scenario.
