The passage of Proposition 19 has many California property owners wondering, ‘How will this change property taxes for me?’ Though expansively titled “The Home Protection for Seniors, Severely Disabled, Families, and Victims of Wildfire or Natural Disasters Act,” the new law makes no changes to how existing property taxes are calculated. If you plan to keep all your real estate for the foreseeable future, expect the status quo. But, if you are considering selling or gifting property soon, Prop 19 may impact you. The law change significantly cuts back on tax breaks for property transfers between parents, children and grandchildren. At the same time, it has expanded opportunities for seniors and others to move homes without an expensive increase in their property taxes.
HOW PROPERTY TAXES WORK
Property taxes are recalculated each time a property is transferred to a new owner, either by a sale, gift or exchange. The amount of property taxes is based on a percentage of the property’s value at the time it was transferred, called its “assessed value.” Each year, property taxes are increased slightly to account for inflation, but historically real estate in California has increased in value at a rate that exceeds inflation. Consequently, many owners who have held property long-term have an assessed value that is much lower than the value that would apply if they bought the same property now, resulting in thousands of dollars saved annually.
In limited circumstances, exceptions apply that allow individuals to transfer property to new owners without changing the property taxes. Prop 19 has changed these exceptions.
IMPACT ON TRANSFERS BETWEEN PARENTS AND CHILDREN
Under current law, parents and children can sell or give residences and investment property to one another without reassessment. A more limited form of this exception applies to transfers from grandparents to grandchildren.
Changes for Residences
Prop 19 still allows transfers of a personal residence between parents and children but under much more limited conditions. While previously, the child could use the residence as he or she pleased, now the child must reside in the property to avoid reassessment. Additionally, the exemption is now capped at the existing assessed value plus $1 million. If the property is worth more than this amount when it passes to the child, the excess portion will be reassessed, and the property taxes increased.
Changes for Other Real Estate
After Prop 19 goes into effect on February 16, 2021, the opportunity for parents to transfer vacation homes or investment property to their children without reassessment will be eliminated. Presently it is possible to transfer property with up to $1 million of assessed value without triggering a reassessment of the property taxes. With highly appreciated property, this can mean the chance to transfer multi-million dollar properties to children or grandchildren without any change in their property taxes. After February 16th, all such property will be reassessed to market value when it is transferred. Thus, time is short if you are considering transferring a property that will be retained long term by your children.
IMPACT ON HOMEOWNERS 55+, SEVERELY DISABLED OR WILDFIRE VICTIMS
The passage of Prop 19 has expanded opportunities for homeowners ages 55+ to change homes without increasing their property taxes. It is currently possible for a homeowner to purchase a new home and have their property tax basis transferred from the home they are selling to their new residence. This is most commonly used by people looking to downsize from a large family home to a smaller home but is also available to those who are severely disabled or who have lost their home due to a natural disaster. Transferring their property tax basis to the new home means they do not have to worry that their tax bill will go up, even though they may have paid more for the new home than they paid for the old one. But the current law only applies if the homeowners are moving between a few select counties, and transfer of property tax basis could only be done once.
Due to the changes made by Proposition 19, homeowners ages 55+ can soon move anywhere within California and take their existing property tax basis with them to their new home. Additionally, after April 1, 2021, the transfer of property tax basis can be done up to three times by the same individual.
To illustrate the impact, a couple could decide to sell their four-bedroom Los Angeles home bought decades ago and move to a two-bedroom home close to the beach, taking the low property tax basis of the L.A. home with them to the beach home. After a few years, they could sell the beach home, buy a townhouse close to their children in Northern California, and once again transfer the property tax basis originally set for the L.A. home to the new townhouse.
Contact Deka Law Group For Questions
Each circumstance is unique and opportunities to save property tax must be balanced against other tax considerations. If you have a question about how Prop 19 affects you, or have been thinking it’s time to manage your affairs with an experienced estate planning tax attorney, Deka Law Group is here to advise you. Click to contact us or call us at (626) 765-6272.