January 13, 2021, 2:01 pm
There’s a lot to love in California’s newly passed Proposition 19. Here’s a broad look at some of the ins and outs.
Expanded Tax Base Portability
The new rule expands tax base portability for California homeowners who are 55 or older, severely disabled, and/or victims of a wildfire or natural disaster.
In short, this means any eligible homeowner may transfer the taxable value of their current home to a replacement home anywhere in the state.
If the replacement home is of greater value than their previous home, the homeowner will retain their previous home’s tax base up to the value of their previous home. Any value above and beyond that will be taxed at the fair market value rate.
So long as the new home is purchased within two years of the sale of the previous home, qualifying homeowners may repeat this process up to three times.
These new rules go into effect April 1st of this year.
Limitations on Intergeneration Family Transfers
Additionally, Prop 19 will alter the tax basis for parent-to-child and grandparent-to-grandchild transfers of property.
Previously, a homeowner could transfer a property to their child/grandchild, and the current assessed value tax rate would travel with the property. Although there was a cap of $1 million in current assessed value, there was no such cap on the property’s fair market value. Additionally, there was no requirement that the child/grandchild claim the property as their primary residence.
Under the new rules, the child/grandchild must claim the property as their primary residence in order to retain the existing tax basis. And even then, they must pay a fair market tax rate on any value over $1 million.
These new rules go into effect February 16th of this year.
The Big Take-aways
Prop 19 will very likely help free up inventory from seniors holding on to property in avoidance of increased tax liability. In turn, increased inventory should help ease the current housing crisis.
While it’s true the State may be in a position to lose revenue by allowing eligible parties to transfer their tax rate, these transfers will also free up homes to be sold – and taxed! – at fair market value. This should more than offset any potential revenue losses, and in fact generate a surplus.
Furthermore, inhibiting inequities made possible by the transfer of tax rates to children/grandchildren will likely lead to greater equanimity across the board.
Lastly, 75% of the net gains in tax revenue will go to a California Wildfire Response Fund. An allotment of funds we can likely all take comfort in after this most recent wildfire season.
For a deeper dive on Prop 19 read the California Association of Realtors Prop 19 Q&A.