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Did You Know? Prop 19 changes property tax laws

California voters recently passed Proposition 19 by a narrow margin, 51.1% to 49.9%. Why such a slim margin?

It could be argued that Proposition 19 really had two fundamental components to it, each of which could have been its own ballot measure. The first component revolved around the transfer of property tax basis anywhere in California. The second component revolved around property taxes for inherited property.

The Good News

Previously, Proposition 58 allowed homeowners aged 55 and older to transfer their property tax basis for their primary home to one of only ten other counties in California. Proposition 19 essentially replaces Propositions 60 and 90 so that a person who is 55 or older, severely disabled, or a victim of wildfire, can transfer their property tax basis to any other primary residence in California in any county. If your goal is to move closer to family or friends, this is a great tool. A qualifying owner can do this transfer up to three times.

Additionally, an owner can buy a more expensive property and still keep their lower property tax basis; previously, an owner could only buy a property of equal or lesser value. With this new tweak, only the additional amount would be reassessed at the market rate.

For example, say you bought a house for $300,000 in 1985 and now you can sell it for $1.2 million. Your property tax is based on that lower $300,000 purchase price. Now, you are planning to buy a house for $1.7 million. You would get to carry over your old property tax basis and only the additional $500,000 would be reassessed ($1.7m – $1.2m).

The effective date for this aspect of Proposition 19 is April 1, 2021.

The Bad News

If you were planning on leaving your primary residence or rental properties to your children, Proposition 19 eliminates the parent-child property tax inheritance benefits. What does that mean?

Under the current law of Prop 58, parents can leave a primary home to their children with no property tax consequence/change. For example, Mom or Dad bought a house in the 1970s for $200,000. 50 years later, the house is worth $1.7 million. Mom and Dad pass away and the child inherits the house. The child also inherits the same low property tax basis – based on the $200,000 purchase price — and has the option to move in or rent the property.

Under the new Proposition 19, parents can leave a primary home to their children, but the property tax basis has limited protections: only the assessed value + $1million. In the prior example, the child inherited a house valued at $1.7 million and the property tax stayed the same. But under Prop 19, we take the assessed value of $200,000 and add $1million for a total of $1.2 million. The additional $500,000 ($1.7m – $1.2m) will be reassessed, thus increasing the property taxes on the inherited house.

Additionally, the child must declare that the inherited house is now their primary residence and file the exemption within one year of the date of death.

For rental properties, parents currently can leave $1 million EACH in assessed value to children, so $2 million total. However, under the new law about to take hold, there are no protections for rental properties and the property tax on all rental properties will be reassessed to the higher market rate.

The effective date for this aspect of Proposition 19 is February 16, 2021.

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05-03-2021

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