Proposition 19, which passed in November, has some significant changes regarding property taxes that homeowners and potential buyers should know.  These changes affect property taxes’ on portability, intergenerational inheritance, and supersede propositions 60 & 90. 

Why Proposition 19?

California is facing a housing crisis with a severe shortage of homes for sale to meet buyer demand.  Proposition 19 allows homeowners 55 and over, those with severe disabilities, wildfire victims, or victims of other natural disasters, to transfer their tax base to a replacement home anywhere in California.  The intent is that by making it more affordable for seniors to move to homes better suited to their changing needs, there will ultimately be an increase in housing inventory for new families and first-time home buyers. 

How is Proposition 19 different in terms of Tax Portability?

Several changes take place with Proposition 19 regarding tax portability that will supersede Propositions 60 & 90.

• The tax base can be transferred to a replacement primary residence anywhere in the state. Proposition 60, passed in 1986, only allowed for the transfer between certain reciprocal counties.
• There are no limitations on the replacement property value. Proposition 90, passed in 1988, required the replacement property to be of equal or lesser value. However, if its value exceeds $1M over the original property’s taxable value, there will be adjustments to that amount that is over the benchmark.
• The tax basis must be transferred to the replacement property within two years of the sale of the original property.
• This Tax Portability can be used up to 3 times (or as often as needed for those whose homes were destroyed by fire). Proposition 60 only allowed a one-time transfer. 

Just as under Proposition 60, the replacement home can be purchased before selling the original home. This new tax portability law takes place beginning April 1, 2021. 

What changes impact intergenerational transfers to children or grandchildren?

Inheritance transfer may be where we see the most significant difference in Proposition 19.  Children and Grandchildren who receive a home as inheritance must use it as their primary residence to keep the tax basis.  Again, if the home’s current value exceeds $1M of the original tax basis at the time of transfer, the upward adjustments will be made to that amount that exceeds the $1M benchmark.  Proposition 19 changes regarding intergenerational transfers begin February 16, 2021.

Who wins and who loses with Proposition 19?

Winners

The biggest winners would have to be homeowners over 55 who can now move into a new and more expensive home but retain their lower property taxes.  Proposition 19 builds off of Proposition 13 passed in 1978 that limited property taxes to 1% of the homes taxable value (based on the year the property was purchased) and restricts how much taxable value can increase every year.

Obviously, homeowners receive more benefits the longer they stay in their homes because of restricted tax bills but could then face a surge in property taxes if they move to a new, more expensive home.  This is precisely what Proposition 19 seeks to address. 

Qualified homeowners who have already used the one-time exemption under Proposition 60 will now have that option available again.  

Who Loses?

Those who stand to lose the most are those who inherit their family’s home but intend to keep it as a second home or rent it out.  Their taxes would go up a lot. 

According to the state’s nonpartisan Legislative Analyst’s office, about 650,000 California homeowners received a tax break over the past decade that allows them to maintain their parent’s low tax payments.  A 2018 Los Angeles Times investigation determined that many of those inherited homes lie along the coast and are likely used as investment properties.  Proposition 19 would eliminate this property tax break for investment homes and commercial properties, meaning heirs would pay taxes based on the market value. 

Concluding…

In the end, the intent of Proposition 19 is to help senior homeowners while relieving some of the pressure from the home inventory crisis California is facing.  Simultaneously, the curtailing of the inheritance property tax break is expected to more than offset the lost revenue from the relief offered to older homeowners. 

Time will tell, but as stated in the beginning, if you are in the market for a new home, we would encourage you to talk to a tax professional before taking this big step.   We, of course, would also like to speak with you about your next real estate move but must remind you we are realtors, not tax attorneys.  And if you don’t have a tax professional that you know or trust, we can help you get connected to one as well.

We look forward to hearing from you.