Remember all of those propositions on the November ballot? Number 19 won, and might prove to be your winning number as well…
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.
How does Proposition 19 change the rules on tax basis portability?
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 does 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.
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.
When do these new rules on intergenerational transfers apply?
February 16, 2021.
Where may a claim to transfer a tax basis be made?
Claims may be made with forms provided by the local county assessor’s office.
What if I don’t yet own a home—how will this help me?
The thinking goes like this. Most people who live in homes they’ve owned for many years, could not afford to buy the home where they currently reside, let alone afford the new property taxes.
For example, if one owns a home purchased in 1987 for $150,000, their property tax payment would have started at around $1,875 a year. Thirty years later, assuming the worst case scenario that the property was reassessed at the maximum 2% each year, their property tax would increase to a minuscule $3,850 per year.
To purchase that same home 30 years later, using the S.F. Metropolitan Statistical Area (MSA) data provided by Case-Shiller, which shows an increase in value of 1836% during that time, our $150,000 house would now cost ~$2,754,000, with an annual property tax bill of ~$34,425.00.
It’s rather easy to see why a long-term homeowner would be reticent to make a move.
That could all change.
Homeowners, who prior to proposition 19 were likely to stay in place to preserve their low tax base, may now take that base with them, along with their substantial realized equity, to any county in California, opening-up a myriad of retirement opportunities previously unavailable.
This is where future home buyers could benefit. As more homeowners realize the opportunities found in prop 19, they can now seek more affordable areas to live. This of course could be a boon for new home buyers, as housing inventory will increase, lessening the frustration of bidding wars, and bringing some equilibrium to the market.
If you are a long-term homeowner who wants to take advantage of this opportunity, be sure and contact your tax or legal professional for advice on protecting your options— and be sure to contact us should you decide to make a move.
Drew & Christine Morgan are REALTORS/NOTARY PUBLIC in Belmont, CA. with more than 25 years of experience in helping sellers and buyers in their community. As Diamond recipients, Drew and Christine are ranked in the top 50 RE/MAX agents nationwide and the top 3 in Northern California. They may be reached at (650) 508.1441 or emailed at firstname.lastname@example.org.
The information contained in this article is educational and intended for informational purposes only. It does not constitute real estate, tax, insurance or legal advice, nor does it substitute for advice specific to your situation. Always consult an appropriate professional familiar with your scenario.