With the recent passage of Proposition 19, many Californians are wondering how this will impact them. Proposition 19 is split into the following two parts:
Homeowners who are 55 or older, severely disabled, or who have lost a home in a natural disaster can now transfer their original property tax basis (within California) to a more expensive home up to three different times (instead of the previous one-time allowance), effective April 1, 2021.
There are a few requirements that must be met in order to qualify for the transfer:
- The homeowner (or at least one spouse if married) must be 55 years old (or older), disabled or a victim of a natural disaster or wildfire.
- The original residence must be the primary residence of the homeowner.
- The new residence must be of equal or lessor value compared to the original residence. If the new residence is of greater value than the original residence’s value, then the difference between the two values must be added to the taxpayer’s property tax basis.
- The new residence must be purchased within two years before or after the sale of the original residence.
- The homeowner must file an application with the assessor of the county where the new residence is located.
- Person A is an individual over the age of 55. Person A has a property tax base of $100,000 on their original residence. Person A sells their original residence for $600,000 and purchases a new residence within two years for $500,000. Person A’s property tax base on their new residence would be $100,000 since the fair market value of their original basis is higher (or equal to) than the fair market value of the new residence purchased.
- Assume the same information as in example one except that Person A purchased their new residence for $700,000. Person A’s property tax base on their new residence would be $200,000 ($100,000 original tax base + $100,000 ($700,000 new residence purchase price – $600,000 original residence sales price)).
The second part of the proposition calls for the elimination of an exemption used when someone transfers a house to a child or a grandchild if the child or grandchild doesn’t live in the inherited house. If the transferee plans to use the property as a second home or rental, the property tax value will be reassessed.
The proposition further states that even if transferee uses the home as a main residence, the property tax assessment will increase if the home’s market value exceeds $1,000,000. The transferee will only assume the property tax basis on the first $1,000,000. This part of the proposition is effective starting February 16, 2021.
- Person B inherits a residence that they will use as main residence with a property tax basis of $100,000 and a fair market value of $600,000. Person B’s property tax basis will remain $100,000 because the fair market value of the residence is less than $1,100,000 ($100,000 original property tax basis + $1,000,000).
- Assume the same information as in example one except that Person B inherits a residence with a fair market value of $1,200,000. Person B’s property tax basis will be $200,000 ($100,000 original property tax basis + $100,000 ($1,200,000 fair market value – $100,000 original tax basis – $1,000,000).
Windes can help with your questions on property tax issues. For more information, please contact our tax professionals at email@example.com or toll free at 844.4WINDES (844.494.6337).