Californians passed proposition 19 last week, altering California’s property tax assessment landscape in two major ways.
First, proposition 19 allows individuals over 55 years of age, severely disabled individuals, and individuals who are the victims of a wildfire or natural disaster to transfer the taxable value of their primary residence to a replacement primary residence anywhere in the state of California. Under current law, if an individual sells a primary residence and purchases a replacement residence, the tax assessment on the new residence is its purchase price. The new law will modify this for qualified individuals, allowing those individuals to preserve the lower tax rate associated with a prior residence.
For example, let’s say Bob and Mary purchased their San Francisco home in 1975, paying $100,000 for it at the time. With annual property tax and assessment increases, Bob and Mary’s property tax basis is now $190,000 and their annual tax bill is $2000. The property has significantly appreciated and is now worth $2M. If Bob and Mary sell their home and purchase a replacement residence, they will lose their low tax base rate. Let’s say they want to move to San Diego to be near their grandchildren. If they purchase a $2M home in San Diego, under current law their annual property taxes would be somewhere north of $20,000 – a tenfold increase in property taxes over their current San Francisco home. Proposition 19 changes this, allowing Bob and Mary to “take their tax basis with them” by substituting the new home for the old one without incurring a property tax “penalty”. This residence “substitution” will also be available to individuals who have been displaced from their homes by wildfire or natural disaster.
The flip side of Proposition 19, however, is less rosy for families with investment or vacation properties they wish to transfer to their children. Under current law, parents can leave up to $1M worth of vacation or investment properties to children at the tax basis the parents established during their lifetime. So, that family cabin in Tahoe can stay in the family without triggering a significant tax hike upon a parent’s death. Proposition 19 eliminates this opportunity. Under Proposition 19, only a primary residence is qualified to maintain a parent’s tax basis in the property, and only if the child also maintains the property as a primary residence. This means that the old family cabin or that little surf shack will trigger a new property tax basis upon the death of the owner(s), even if they are transferring the property to their children.
The new law is effective as it relates to vacation/investment properties beginning on February 16, 2021. Transfers which occur on or before February 15, 2021 will still qualify for the parent-child exclusion available under existing law. If you own vacation or investment property which you plan on passing to your children and would like to explore opportunities to take advantage of the current property tax laws while you still can, give us a call to schedule a consultation.
*Please note at the date of this publication the results of the election have not been certified, however, proposition 19 appears to have passed.
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