Proposition 19 (Prop 19), which initially went into partial effect on February 16, 2021, addresses several concerns surrounding property tax portability as well as intergenerational transfers.
Prop 19's primary focus is on property tax portability. The proposition grants homeowners over the age of 55, homeowners with severe disabilities, and those who've fallen victim to wildfire or natural disasters the right to transfer their current tax assessments to a replacement home.
Prop 19 also alters the standing around exemptions on intergenerational transfers by limiting them to primary residences to a child (or grandchild if parents are deceased) only if the property is to continue as a family home used by the child (or grandchild). If there's too great of a difference between the taxable value and actual value, the property is subject to a new taxable value.
Although both provisions are relatively straightforward, there remain plenty of questions around Prop-19's overall purpose and a few of its finer details. Let's answer as many of those questions as we can by exploring Prop 19.
What is the purpose of Prop 19?
As it relates to property tax portability, Prop 19 aims to address several needs. Its primary goal is to serve as a tax savings program for those whose current living situation is burdensome or untenable.
For those 55 and older—effectively retirees and seniors—it relieves the undue burdens of aging. Individuals can move away from homes that may now prove too much to care for and into a home better suited to their needs without facing a tax penalty. They may also choose to relocate closer to their family or medical and treatment facilities, as long as the move is within California.
Ultimately, Prop 19 takes away unnecessary price, and location restrictions and lets seniors take their current tax base to a home that suits their current lifestyle.
For homeowners who suffer from severe disabilities, Prop 19 works in much the same way—move to a replacement home within California without a tax penalty. An individual who qualifies may take advantage of the new rule up to three times.
Prop 19 also serves as a means to provide relief to those who've been victims of disasters, specifically wildfires and other natural disasters. To combat the issue of families facing huge property tax increases when they can least afford it, Prop 19 lets them transfer the damaged home's tax assessment to replacement property within California.
Aside from providing benefits to the three specific groups noted above, Prop 19 aims to indirectly benefit millions of other individuals: first-time buyers or young families looking for homes.
The goal is that as more seniors relocate from homes that no longer fit their lifestyle into those that do, inventory will increase for first-time homebuyers entering the market.
What if the replacement home's value is the same as or greater than the current home?
Although Prop 19 centers around a replacement home being less than the current home's value, there are situations where the replacement property may be of equal or greater value.
Two examples, provided by the California Association of Realtors, best explain the scenarios in both instances:
Example 1
A senior couple on a fixed income lives in a home valued at $600,000. They pay $2,200 in property taxes (based on the $200,000 original purchase price). They find a $600,000 home to purchase near family in another county but can't afford the new $6,600 annual property tax bill that comes with moving—it could cost $4,400 more in annual property taxes to move.
Under Proposition 19: The senior couple can purchase the $600,000 home in another county without a property tax increase. Prop 19 allows these homeowners to transfer the tax base of their original home to the replacement home, saving $4,400 in annual property taxes.
Example 2
Another senior couple with a home valued at $600,000 (also paying $2,200 in property taxes) wants to downsize from the two-story home that is too big for their needs, is too expensive to maintain, and has stairs that are difficult for them to use. They want to downsize to a more manageable home in a newly built retirement community nearby for $700,000, but they can't afford the $7,700 spike in property taxes that comes with moving.
Under Proposition 19: This couple will save $4,400 in annual property taxes. Prop 19 allows homeowners to keep their existing Prop 13 tax base and transfer it to a more expensive home. The property tax base of the new home is determined by adding the difference between the sales price of the replacement home ($700,000) and the original home ($600,000) to the tax base of the original home ($200,000). In this example, the couple would pay $3,300* in property taxes instead of $7,700 in property taxes. (*The tax savings could be more significant depending on the definition of "equal or lesser" value.)
Does Prop 19 impact Proposition 60 for intracounty transfers or Proposition 90 for intercounty transfers for individuals over the age of 55?
No. Although subject to particular circumstances or specific situations, homeowners over the age of 55 can still take advantage of Prop 60 and Prop 90.
A homeowner is allowed three transfers using Prop 19, regardless of whether they utilized transfers under Prop 60 or Prop 90.
How does Prop 19 impact intergenerational transfers?
Prop 19 is designed to protect family transfers, outlined as a right under the California State Constitution. As stated, it allows the transfer of property from parents to their children (or from grandparents to their grandchildren should the parents of the latter be deceased) without an increase in their property tax bills.
However, Prop 19 does change the rules surrounding the transfers. It now limits the tax exemption to a primary residence only in the instance that the child (or grandchild) continues to utilize said residence as a family home.
It's important to note that should the difference between the taxable value and the actual value be deemed too great. Properties valued at more than $1 million at the time of transfer may also be subject to increased adjustments. If the property value is less than $1 million, the tax basis will stay the same.
Two more examples from the California Association of Realtors further explain:
Example 3
If the original tax basis was $500,000, and at the time of transfer, the property is valued at $1.2 M, then the tax basis will remain at $500,000. This is because $1.2M is not more than $1M over the original taxable basis.
Example 4
If the original tax basis was $500,000, and at the time of transfer, the property is valued at $2M, then the new taxable value will be $1,000,000 ($2M minus $1M). This formula applies because the value of the property at the time of transfer was more than $1M over the taxable basis.
Does Prop 19 also include family farms?
Yes. As defined as any real property that is used for pasture or grazing, under cultivation, or used to produce agricultural commodities, family farms receive the same exemptions.
The transferee is not required to live in the property as their principal residence, and the family farm is not mandated to be used as a principal residence under Prop 19.
Why is the intergenerational transfer aspect of Prop 19 important?
In recent years, family transfer of property has been identified as a means to help generate revenue for schools and both local and state government.
Prop 19 helps protect family transfers as a unique aspect of property ownership, beneficial for housing in general and homeowners specifically.
Does Prop 19 increase property taxes for homeowners?
No. Prop 19 serves to limit any property tax increases for eligible parties for tax portability (seniors, those with severe disabilities, victims of natural disasters) and family transfers (transferred home used as a primary residence).
That said, it is essential to note that unique circumstances may arise where Prop 19 may not apply, or further interpretation is necessary. For these scenarios or more detailed questions regarding the tax implications of Prop 19, consult with your tax professional.
When does Prop 19 take effect?
The updated requirements for intergenerational transfers took effect on February 16, 2021. The new standards for property tax portability took effect on April 1, 2021.
Proposition 19 safeguards family transfers as a right in the California State Constitution, protecting tax savings for children and grandchildren on the family home. Of course, every situation is different, so check with your tax professional to see how Proposition 19 may benefit you.
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