Proposition 19, billed as “The Property Tax Transfers, Exemptions, and Revenue for Wildfire Agencies and Counties Amendment,” passed with 51.1% of California voter approval in November. As a result, 2021 will see sweeping changes in property taxes assessed on personal residences. Here’s a quick guide to Proposition 19.
Proposition 19 changes the rules on tax basis portability
Prop 19 allows a homeowner who is 55 years of age or older, severely disabled (Any person who has a physical disability or impairment, whether from birth or by reason of accident or disease, that results in a functional limitation as to employment or substantially limits one or more major life activities of that person, per California Revenue and Tax Code Sec. 74.3.) or whose home has been substantially damaged by wildfire or natural disaster to transfer the taxable value of their primary residence to the following:
- a) a replacement primary residence anywhere in the state,
- b) regardless of the value of the replacement primary residence (but with adjustments if the replacement has a greater value),
- c) within two years of the sale and
- d) up to three times (or as often as needed for those whose houses were destroyed by fire).
The prior rule limited this exemption to a one-time transfer within the same county (Prop 60) or between certain counties (Prop 90) and only if the replacement property was of “equal or lesser value.”
Proposition 19 does not limit the number of times homeowners, who have had their principal residence substantially damaged due to a qualifying wildfire or other natural disaster, may transfer their tax basis whenever such an event occurs.
The tax basis portability portion of Prop 19 will take effect on April 1, 2021.
Can a buyer/seller take advantage of the tax portability benefits before April 1, 2021?
According to the law, there is no definitive answer. Although, it is believed that the tax benefits under Prop 19 will apply to transactions where either the sale or purchase of a primary residence takes place before April 1, 2021, as long as the subsequent sale or purchase takes place within two years and occurs on or after April 1.
If you’re a buyer or seller who wishes to obtain the tax benefits, for any transaction that will close before April 1, 2021, it is highly recommended that you seek the advice of a qualified California real estate attorney or tax advisor.
On replacement properties
A homeowner may purchase the replacement property prior to selling the original primary property.
The taxable value of the original property may be transferred and become the taxable value of the new one. The tax basis does not change if the replacement property is of equal or lesser value than the original property.
If the replacement property is of greater value than the original property, 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.
Here’s an example situation:
If the 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.
[($1.5M-$1M = $500,000) + $300,000] = $800,000
Does Prop 19 affect the rules on intergenerational transfers to children or grandchildren?
It limits the exemption to those properties where the primary residence continues to be used as a family home by the child or grandchild transferee. If so, the taxable value will remain the same. Subject to some upward adjustments if the property value, at the time of transfer, is more than $1M over the original tax basis.
Family farms also have the same exemptions as Family Homes (principal residence) have. The family farm is any real property under cultivation. That is used for pasture or grazing, or is used for any agricultural commodity. This however does not require the transferee to live in the property as a principal residence.
These new rules on intergenerational transfers apply on February 16, 2021. The transferee would have to claim the homeowner’s or disabled veteran’s exemption within one year of the transfer to obtain the benefit of the family transfer tax exemption.
For more information: Prop 19 – California Association of Realtors
Related to a Quick guide to Proposition 19:Prop19: Making sense of the new Property Tax Measure