States throughout the USA take a variety of approaches to taxation. Some rely heavily on state income tax, others on sales taxes, and many have a strong reliance on property taxes. In California, property taxes primarily go to counties and cities rather than the state (the state gets most of their tax revenue from personal income taxes, sales tax, corporate taxes, etc.) Property tax revenue in California largely goes to the public school system, but also helps fund public safety programs. While there are plenty of complaints about California’s taxes, one issue closely tied to real estate involves property taxes. Specifically, homeowners becoming locked into one home to help preserve their low tax basis. Proposition 19 passed in late 2020 and promises to shake up property taxes as we know them in California. In this article, I will cover the basics of property taxes in California, as well as some of the major features of Proposition 19 (and a couple of the propositions it is replacing). If you are considering selling a home and buying a replacement home in California, you will definitely want to read on to see how Prop 19 might potentially benefit you.
Before we dive into these topics, it is important for me to point out I am real estate agent and NOT an attorney, accountant or tax advisor. None of the following information should be construed as tax or legal advice (I am not qualified nor allowed to provide either). Please consult with a qualified legal or accounting professional before relying on anything you might read here (or elsewhere online for that matter). With all that said, let’s discuss California property taxes and how Proposition 19 might potentially save you thousands of dollars a year in property taxes.
Prop 19 Key Points Summarized
Prop 19 enables homeowners over 55, the severely disabled, and those who have had their homes substantially damaged by wildfire to transfer the taxable value of their primary home to a replacement property anywhere in California. That transfer can be to a property of any value, however, if the replacement property is to a higher value home, then an adjustment is made. The adjustment is not a full reassessment, so there is still a net benefit even when a qualifying homeowner is buying a more expensive home. The timeframe for the Prop 19 benefit is within two years of the prior property’s sale. This benefit can be used up to three times (or more for those who had their homes destroyed by fire).
Prop 19 also affects intergenerational property transfers to children and grandchildren. Although there were formerly broad exemptions for transferring a low taxable value to children and grandchildren, under Prop 19 the exemption is limited to children and grandchildren who will continue to use the home as a primary residence. Even in those cases, if the property value is more than $1M over the original tax basis, upward adjustments to the taxable value are made.
Property Taxes in California
Before we go into further detail on some of the nuances of Prop 19, it is important to understand property taxes in California in general. Much of what Prop 19 attempts to address is part of a multi-decade legacy of property tax propositions of our past, especially prop 13.
Property Tax Rate for California
The base rate for property taxes in California is 1% of the assessed value. In 1978, Proposition 13 was passed which limited property taxes from skyrocketing over time. It was also seen as a way to keep seniors from being taxed out of their homes. The key component of Prop 13 was:
Section 1. (a) The maximum amount of any ad valorem tax on real property shall not exceed one percent (1%) of the full cash value of such property. The one percent (1%) tax to be collected by the counties and apportioned according to law to the districts within the counties.
The proposition does allow for increasing that rate to cover voter-approved indebtedness. As a result, the actual property tax rate in California varies in and among its many counties. Although a more precise number is provided in escrow when purchasing a property (or via a title report’s tax details), I generally advise my clients here in San Diego, California to expect to pay approximately 1.2% of the assessed value per year. For a detailed look, check out my article on Property Taxes in San Diego (which has information relevant to most California homeowners and home buyers).
If a home buyer just purchased a $900,000 home, at 1.2%, their property taxes would be roughly $10,800 per year, (or $900 per month). Again, this is an approximate estimate but is usually pretty close to accurate. Although some say our property taxes in California are consistent with many other states, the fact that we have some of the highest property values in the country means we pay a lot in property taxes.
There are also exemptions that can effectively lower the property tax rate such as the Homeowner’s exemption for qualifying owner-occupied homes, veteran’s exemption, etc. (consult with your accountant or tax pro for details). Thanks to Prop 13, California property tax can increase by only 2 percent yearly or the rate of inflation, whichever is lower. One of the benefits of this structure is that people can reliably predict their property tax liability.
A downside of Prop 13 is that current homebuyers disproportionately foot California’s property taxes. The discrepancy in tax bills looking at someone that has owned their home for 20 years vs someone that just purchased is also why many longtime homeowners in California are reluctant to sell. They simply do not want to lose their property’s low taxable value.
What About Prop 60 and Prop 90?
Prop 60 and Prop 90 are similar laws to Proposition 19 related to property tax portability. They are current law until April 1st, 2021 at which point the tax portability aspects of Prop 19 will be the current law. Prop 60 and prop 90 attempted to address the issue of longtime homebuyers being reluctant to sell their homes due to their low tax basis. Both propositions allowed homeowners 55 or older (meeting several other criteria) to purchase a replacement of equal or lesser value and retain their prior home’s taxable value. Proposition 60 applied to qualifying purchases within the same county. Proposition 90 applied to inter-county transfers between a handful of counties including San Diego, Los Angeles, Orange, Riverside, San Mateo, and several others.
Prop 60 and prop 90 could only be utilized as a one-time benefit. While a helpful provision for some, many longtime homeowners and seniors with the motivation to move were still deterred from doing so. A homeowner looking to move to a county not among the Prop 90 shortlist, or those wanting to move into a home that costs more than their existing home was still left with unappealing options. Proposition 19 attempts to provide more flexibility and benefits to many, however, it also has provisions that will impact heirs and estates involving homes that have historically remained within a family.
Proposition 19 – Property Tax Portability
The following table shows some of the nuances of the former law vs how property tax portability is handled under Proposition 19 provisions:
How Does Prop 19 Calculate Taxable Value When the Replacement Property is of Higher Value?
According to the California Association of Realtors, “The new taxable value is calculated by adding the difference between the full cash value of the replacement property and the original property to the original taxable value. For example, if a seller of an original property has a $300,000 taxable value and a full cash value of $1M and then buys a replacement property for $1.5M,
the taxable value of the replacement property would be $800,000.”
Prop 19 Intergenerational Transfers
Proposition 19 is expected to generate a lot of revenue. I expect much of that revenue to come from the new way property transfers between parents and children and grandparent and grandchildren will be handled. The table below from the California State Board of Equalization sheds some light on how intergenerational property transfers were handled previously, and how they are handled under Prop 19:
Prop 19 Effective Dates
According to the CA State Board of Equalization, Prop 19, “. . . became effective on December 16, 2020, the 5th day after the Secretary of State certified the election. However, the changes to the parent-child and grandparent-grandchild exclusion will become operative and apply to transactions on February 16, 2021, and the base year value transfer provisions will become operative on April 1, 2021.”
Depending on what aspects of Proposition 19 might be relevant to you, the effective dates here can have a substantial impact on you and/or your estate. The various dates are yet another reason to make sure you consult with an appropriate real estate lawyer, estate planner or your accountant.
Proposition 19 and Refinancing
The provisions of Prop 19 are not expected to impact the typical refinancing of homes.
What About Prop 58 and Prop 193?
Per the CA BOE: “Proposition 58, effective November 6, 1986, is a constitutional amendment approved by the voters of California which exclude from reassessment transfers of real property between parents and children. Proposition 58 is codified by section 63.1 of the Revenue and Taxation Code.
Proposition 193, effective March 27, 1996, is a constitutional amendment approved by the voters of California which exclude from reassessment transfers of real property from grandparents to grandchildren, providing that all the parents of the grandchildren who qualify as children of the grandparents are deceased as of the date of transfer. Proposition 193 is also codified by section 63.1 of the Revenue and Taxation Code.”
Both of these earlier propositions will be replaced by Proposition 19 and its provisions.
Where Do I Make a Claim for a Transfer Under Proposition 19?
Your county local assessor’s office should be able to direct you to the appropriate forms as well as answer any questions you might have regarding Prop 19 details.
How Will Prop 19 Impact the Real Estate Market?
One look at the FAQ page for Prop 19 on the CA Board of Equalization reveals that although Prop 19 has passed, some questions about its implementation remain. Homeowners who may have sold prior to the effective dates and those that might have used Prop 60 or 90 previously are left with some ambiguity about what sales may or may not qualify to transfer a prior taxable value.
Much of California has experienced an extended period of low inventory. In the decades that have passed since Proposition 13’s landmark passing, many California homeowners have been deterred from selling. Long-term homeownership is clearly rewarded with relatively low property taxes. The following graph shows a live look at the last five years of actual inventory in three major California counties:
Generally, six months of inventory is considered “healthy” by most economists and reflects a good balance between buyers and sellers. The graph as of today’s date, shows we haven’t hit that “healthy” number in the last five years. Furthermore, inventory levels in LA and San Diego are extremely low (approaching 1 month vs the more neutral six-month metric).
The California Association of Realtors, or CAR, and the National Association of Realtors, or NAR, (both of which I am a member of)
were the driving financial force behind Prop 19’s ultimate passage. I would expect the provisions of Prop 19 to significantly increase the number of residential real estate sales transactions. This increase will come from both sellers taking advantage of tax basis portability and from heirs of properties that will have more incentive to sell vs hold and/or rent properties they inherit. I would also expect it to increase the amount of inventory available. Of course, some of that new inventory will also be accompanied by new buyer demand (those sellers taking advantage of Prop 19’s tax basis portability will also, by definition, become buyers somewhere in California).
Ultimately, time will tell how California’s Proposition 19 plays out. However, there is little doubt we’ll see more market activity (and tax revenue) as a result of it. In the meantime, longtime homeowners over 55, the severely disabled and those who have lost homes to wildfires will be clear and immediate beneficiaries. Buyers that have been in the highly competitive markets with minimal inventory may also benefit from more homes to choose from (and possibly less competition as a result).
A quick reminder that none of the information presented here should be construed as tax, financial or legal advice (I am not qualified nor allowed to provide either). Please consult with a qualified legal, tax, and/or accounting professional to discuss how Prop 19 may or may not be applicable to your specific circumstances.
Additional Prop 19 Resources
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