In the November 2020 election, Californians voted to pass a new law, Proposition 19, which will affect the property taxes for older adult homeowners. Seniors should educate themselves about the new law because the law may impact older adults’ estate planning decisions. Prop. 19 has two distinct components. First, Prop 19 changes the way property taxes are calculated for property owners aged 55 and older. Second, Prop 19 will impact property transfers from parents to their children.
Property Tax Assessments for Adults Aged 55 and Older
What does the current law say?
Under the current law, homeowners age 55 and older or people with certain disabilities may keep their existing property tax basis if they sell their home and move to a new home. Homeowners were only allowed take advantage of this once in their lifetime. Additionally, the new home had to be located in the same county as the old home or in one of the ten California counties that allowed intercounty transfers. Lastly, the purchase price of the new property had to be equal to or less than the sale price of the old property.
What does the new law say?
Under the new law, homeowners who are aged 55 and older, who are severely disabled, or whose homes were destroyed by a wildfire or some other disaster will be able to purchase a new home and transfer the taxable value of their old home to the new property. The replacement residence can be worth any value and can be located anywhere in California.1 If the homeowner chooses to purchase a new home with a higher value than that of the old home, that new home’s taxable value will be equal to the value of the old home plus the amount by which the new home increased in value. This means that the difference in the market value between the older home and the newer more expensive home will be added to the old home’s tax base.2 Homeowners who wish to take advantage of this benefit will need to apply for the benefit by filing a claim with the county assessor. This portion of the law will take effect on April 1, 2021. Property owners will be able to take advantage of this and transfer their property tax value to a new home up to three times.
Parent to Child Property Transfers
Prop 19 places limits on tax benefits for certain transfers of property between family members.
What does the current law say?
Under the current law, parents (or grandparents if the parents are deceased) may transfer a principal residence, worth an unlimited value, to a child and the property value will not be reassessed. Family members may also transfer another rental or commercial property and exempt up to $1 million of the assessed value.
How does Prop 19 change this?
Prop 19 changes the current law by eliminating the principal residence exclusion except in cases where the child makes the property their principal residence. This means that the property’s value will be reassessed when the property is transferred to the child, except if the child lives in the property as their principal residence.3 Even in instances where the child does make the home their principal residence, Prop 19 imposes a cap of $1,000,000 on the exclusion, meaning that the home will be partially reassessed, but not to the level of the home’s full market value. Under Prop 19, transfers of rental or commercial properties will be reassessed to the fair market value of the property at the time of transfer, thereby increasing the property’s tax base.4 This portion of the law will take effect on February 16, 2021.
To learn more about Prop 19, click here to view a chart from the State Board of Equalization that lays out the differences between the old law and the new law.
1 SFGate, https://www.sfgate.com/news/editorspicks/article/What-are-the-implications-of-Prop-19-15731809.php?IPID=SFGate-HP-CP-Spotlight
2 SF Chronicle, https://www.sfchronicle.com/business/networth/article/Prop-19-passes-but-questions-about-California-15722774.php
3 SF Chronicle, https://www.sfchronicle.com/business/networth/article/Prop-19-passes-but-questions-about-California-15722774.php
4 American Academy of Estate Planning Attorneys, https://www.aaepa.com/2020/11/planning-for-californias-proposition-19/