The Impacts of Proposition 19 on Property Taxes

On November 3, 2020 California voters passed Proposition 19 known as the Home Protection for Seniors, Severely Disabled, Families and Victims of Wildfire or Natural Disasters Act.  Prop 19 will make changes to the special rules for certain eligible homeowners to transfer their tax basis and will limit the tax basis transfer on inherited properties.  The net result will be increased collection of property taxes, with the funds generated thereby being used to provide funding for fire protection.

There are two parts to Prop 19 that affect eligible homeowners.  The first is an expansion of the rules beginning April 2, 2021 that includes removing location restrictions, limiting property tax increases, and increasing the number of times the special rules can be utilized.  The second narrows the special rules for inherited properties. Starting February 16, 2021, the measure will end special rules for properties not used as a home or for farming and requires the tax bill to go up for high value inherited homes and farms.

Let us start with the expansion of the rules and what it does for eligible homeowners.  Eligible homeowners could keep their lower property tax bill when moving to another home anywhere in the state. The specific language states:  The owner of primary residence who is over 55 years of age, severely disabled, or a victim of a wildfire or natural disaster may transfer the taxable value of their primary residence located anywhere in the state that is purchased or newly constructed as that person’s principal residence within 2 years of the sale of the principal residence.

Eligible homeowners could use the special rules to move to a more expensive home. Their property tax bill would still go up but not by as much as it would be for other homebuyers. The specific language states: If the replacement principal residence is of equal or lesser value than the original primary residence, the taxable value of the replacement primary residence shall be deemed to be the taxable value of the original primary residence. If the property purchased is of greater value the following would apply: If the replacement principal residence is of greater value than the original primary residence, the taxable value of the replacement primary residence shall be calculated by adding the difference between the full cash value of the original primary residence to the taxable value of the original primary residence.

Homeowners who are over 55 or severely disabled could use the special rules three times in their lifetime. Specific language states: Qualifying owners shall not be allowed to transfer the taxable value of a primary residence more than 3 times.

The second part of Prop 19 narrows the rules for inherited properties and transfer of property.  Prior to Prop 19 in California, parents or grandparents (in certain circumstances) could transfer primary residential properties to their heirs without the property’s tax assessment resetting to market value. Other types of properties, such as vacation homes and business properties, could also be transferred to certain heirs with the first $1 million exempt from re-assessment when transferred. Post Prop 19, the rules will only apply to properties used as a primary home by the parent and then subsequently by the child or grandchild. Second, the rules would apply to farms. Properties used for other purposes could no longer use the special rules.

In addition, the property tax bill for an inherited home or farm would go up if the price the property could be sold for exceeds the property’s taxable value by more than $1 million (adjusted for inflation every two years). In this case, the tax bill would go up but not as much as it would if the property were sold to someone else.

California anticipates significant additional tax revenue as a result of these changes.  As a result, Prop 19 dedicates certain money for fire protection by creating a CA Fire Response Fund within the state treasury that will receive funds from property taxes increased through the narrowed rules.

Because both changes are set to occur in early 2021 so those considering transferring properties to their heirs should discuss timing with their attorney or accountant to determine if doing so prior to the change would be financially beneficial.  So too, those eligible for the tax basis transfer should consult with their advisors about timing their move.