CALIFORNIA PROPOSITION 19: CHANGES IN PROPERTY TAX RULES

Proposition 19, which expands the California property tax break for older adults and severely disabled individuals, while limiting the tax breaks for transfers of real estate between parents and their children, has passed by a narrow margin. The voting result is expected to be certified by December 11, 2020.

In California, a property owner’s annual property tax bill is equal to the taxable value of their property multiplied by their property tax rate, and the typical property tax rate ranges from 1.10 to 1.50%. When a new owner takes over a property, its taxable value typically is its purchase price. Each year after that, the taxable value is adjusted for inflation by up to 2%. When a property changes ownership again, its taxable value is reset to its new purchase price.

Special Rules Before Proposition 19

There are currently special rules that apply to “eligible homeowners” who are individuals over 55 years old or severely disabled or those whose property has been impacted by a natural disaster such as a wildfire or earthquake. An eligible homeowner can move within the same county and keep paying the same amount of property taxes if their new home is not more expensive than their existing home. There are also certain counties which allow the same carryover taxable value when an eligible homeowner moves to their county from another county. Homeowners who are over 55 or severely disabled can use these special rules only once in their lifetime. This limit does not apply to homes affected by a natural disaster.

There is also a special rule that allows properties to pass between parents and their children or grandchildren (if the children are deceased). Parents may transfer a home that is their primary residence to their children without an increase in the property tax bill. In addition to their primary residence, parents may also transfer up to $1 million of assessed value of other real estate such as rental or commercial property to their children or grandchildren, without triggering reassessment. The $1 million exclusion applies to each transferor, so if two parents are transferring real estate they own jointly, the total exclusion is $2 million.

Changes & Effective Dates of Proposition 19

Expanded Special Rules for Eligible Homeowners, Starting April 1, 2021: Eligible homeowners may keep their lower property tax bill when moving to another home anywhere in California. The new rules also allow eligible homeowners to move into a more expensive home. Their new property taxable value will still increase by the difference between the full cash value of the original home they moved out of and the full cash value of the new home. This increase will be added to the taxable value of their old home. A homeowner who is over 55 or severely disabled can utilize this expanded special rule up to three times in their lifetime. There is still no limit to homes affected by a natural disaster. Eligible homeowners have a two-year window after selling their old home to buy a new one.

Narrowing Special Rules for Inherited Property, Starting February 16, 2021: The special rules for inherited property will be narrowly applied. First, the exemption from property taxable value reassessment will only apply if the child or grandchild uses the property as their primary home. The exemption from reassessment also applies to family farms. Inherited properties used for other purposes such as vacation homes, rental or commercial properties will be subject to reassessment under the new rules.

Second, the property tax for an inherited home or farm will still increase if the fair market value of the inherited property at the time of transfer exceeds the property’s assessed value by more than $1 million (adjusted for inflation every two years). The property tax bill will increase, but it will not be higher than the increase if the property were sold to someone else.

Finally, the $1 million exemption from reassessment on other real estate transferred from parents to children has been abolished and these real estate transfers will face reassessment upon transfers occurring on or after February 16, 2021.

The California Board of Equalization still needs to provide clarifying details on how these new rules will be implemented. If you believe the new rules under Proposition 19 can affect you and your family’s real estate holdings, we recommend that you assess whether it makes sense to sell, gift or transfer ownership of the real estate before the changes take effect in early 2021. We can help you navigate these rules and review income tax and gifting strategies that you and your family could implement before the end of the year. Please connect with us for guidance.