What You Need to Know About (California Prop 19)
If you live in California, you may have heard some of the buzz surrounding the passage of Proposition 19 in November. The measure passed by only a slim margin and has met a lot of controversy among California citizens. It changes the rules for the way property tax values can be transferred when selling a home, including through inheritance.
Whether you’re in support of California Prop 19 or not, it went into full effect at for property transferred after Feb. 16, 2021 for intergenerational transfer exclusion) and April 1, 2021 (for base year value transfer). Read on to learn more about this new law and how it may impact you.
How California Property Taxes Work
Before we dive into the specifics of California Proposition 19, let’s talk some about how current property taxes work. Most areas nationwide, property taxes are based on the assessed value of the property being taxed. The higher the value of the property, the more the property owner will pay in taxes each year.
However, in California, a property’s value is based on its purchase price rather than on regular value assessments. The value of a property does go up each year by 2 percent or the rate of inflation, whichever is lower. But until the home is sold again, California does not perform another assessment of the value for tax purposes.
What Is Proposition 19?
Proposition 19 is a measure that deals with property tax transfers, exemptions, and tax revenue. Specifically, it deals with the regulations governing how homeowners can transfer tax values among homes. It also impacts tax assessments for homes being passed along through inheritance.
One of the biggest changes is that some homeowners can now transfer the tax value of their home to a new home of higher value. The measure also raised the limit on the number of times a resident can transfer their tax value. And there are changes to the structure of tax assessments for inherited homes that are not being used as a primary residence.
When Did It Pass?
Proposition 19 got its start in 2018 when the Realtors Association collected enough petition signatures to put the measure before the state legislature. Both chambers of the legislature passed Proposition 19 with a more than two-thirds majority. From there, it went to the voters of California for consideration on the November 2020 ballot.
The measure passed by a narrow margin in the November election, gaining 51 percent of the roughly 15 million votes cast. It went into effect on February 16, 2021, but there are some transactions that may be able to use Proposition 13 rules until April 1, 2021.
Who Does It Impact?
The primary focus of Proposition 19 is homeowners who are over the age of 55, who are severely disabled, or who have been impacted by wildfires. Any person who has a disability that impacts their ability to work or substantially impacts their ability to participate in one or more major life activities qualifies as “severely disabled.” In 2020 alone, wildfires destroyed more than 10,000 structures and killed thirty-one people.
However, the new law impacts more than just property owners themselves. It may also have an impact on children and grandchildren who might have inherited homes from their family members. They may face significantly higher taxes on inherited homes thanks to Proposition 19.
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Tax Assessment Transfers
There are a number of cases in which a current homeowner may want or need to buy a new home, but may be reluctant to face the new property taxes. If a resident’s home was destroyed in a wildfire, they might have to find a new home that has significantly higher taxes than their old home. Older adults who want to downsize and disabled adults who need more fitting accommodations may also be reluctant to give up their lower property taxes.
Under Proposition 19, qualifying homeowners can transfer the tax value of their old home to a new residence. The previous law only allowed homeowners to make this transfer if they were moving to a home of equal or lesser value. Proposition 19 allows homeowners to transfer to a higher value home and keep their current property taxes.
New Transfer Limitations
In the past, not only was a homeowner limited on the value of their new home, they were also limited on how many times they could transfer their tax value. A homeowner could only transfer their old tax value to a new home once in their lifetime. This left people who were impacted by wildfires or who became disabled later in life short on options.
However, Proposition 19 has changed the number of times you can transfer these tax values. You may now transfer your home’s existing tax value to a new home up to three times in your life. This provides more flexibility to those who may be impacted by serious disasters.
Inherited Home Rules
The way homes are passed from parent to child has also changed under Proposition 19. Under Proposition 13, a parent or grandparent could pass a home down to their heirs without any change in the home’s tax value. Heirs could continue paying the lower property taxes whether they lived at the residence or not.
Now, homes are assessed for a new tax value when they are passed down through inheritance. If the heirs are not using the home as their primary residence, they’ll have to pay the full current tax value starting when they inherit the home. If they are living in the home, there will be a value cap of $1 million; any value above that will be taxed at the current market value.
One of the primary aims of Proposition 19 was to increase public revenue to help families impacted by wildfires. Previously, there were a number of homes that were paying property taxes that were far lower than the true value of the home. The increased taxes on inherited homes, especially those not being used as a primary residence, will put a lot more money into public revenue.
The money raised through changes to Proposition 19 will go to help victims of wildfires. Last year, California experienced more than 57,000 wildfires that burned more than 10 million acres of land.
Of the money raised through this measure, 75 percent will go to the Fire Response Fund. Fifteen percent will go to the County Revenue Protection Fund, and the remaining 10 percent will be allocated elsewhere.
Upsides of Prop 19
One of the primary benefits of Prop 19 is that it puts more money into the funds to prevent and fight wildfires. The Fire Response Fund helps pay firefighters who battle these dangerous wildfires. The County Revenue Protection Fund helps to cover any revenue counties may lose as a result of Prop 19.
Prop 19 also makes it easier for older and disadvantaged people to find a home that meets their needs. Because they can transfer tax values, older adults may be more likely to downsize into homes that work for them. Disabled people and people impacted by wildfires will also have better financial protection in the event of a disaster.
Downsides of Prop 19
But not everyone is happy about the new measures Prop 19 is putting into place. Many families have intended to pass along homes to their children or grandchildren, and the heirs have counted on the lower property taxes to make the home affordable. Some heirs even planned to use the property as an investment opportunity, renting it out and adding the tax savings to their passive income.
Prop 19 means that heirs will now lose almost all the tax benefits they would have gained from inheriting their parents' home. If they’re using the home as their primary residence, they can still get some discount on the taxes. But any plans to use the property as an investment will now be seriously hampered by the new tax law.
Learn More About California Prop 19
Property tax is something of a hot-button issue in California, given that the state has one of the most expensive real estate markets in the country. Proposition 19 changes the rules for how property tax assessments can be transferred, both by current homeowners and through inheritance. The measure is expected to raise more revenue for California, which will go towards preventing and fighting wildfires.
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