Prop. 19 Explained: What You Need to Know About the Property Tax Overhaul

It was a squeaker, but voters in November 2020 narrowly approved California’s Prop. 19, which reshapes state property tax laws to give breaks to older homeowners while also increasing taxes on certain inherited and gifted family properties. With the first provisions of Prop. 19 taking effect on Feb. 16, 2021, property owners need to know how the complex legislation impacts everyone from elderly and disabled homeowners to fire victims and first-time home buyers.

Depending on who you are and what kind of property you own, Prop. 19 might save you a lot of money on your next move. Or it could cost you and your heirs.

We spoke with folks at the California Association of Realtors (C.A.R.) and estate planning attorneys to bring you this explainer. If you have questions about your particular situation, consult a qualified CPA, real estate attorney, tax advisor, or estate planner.

Let's start with the Prop. 19 basics:

California's Prop. 19 has two distinct provisions related to intergenerational transfers and tax basis portability.

Intergenerational Transfer

Before we launch into the details, please note: It is essential that you discuss any intergenerational transfers with your own tax and/or legal advisor prior to such a transfer regarding compliance with Prop. 19 and the effect of that transfer, if any, on other taxes which could be triggered by the transfer.

California's Prop. 19 closes the so-called Lloyd Bridges loophole, a reference to the generous property tax advantage the actor’s children benefited from after inheriting their dad’s Malibu home in 2009.

For decades, Prop. 13 allowed children to inherit their parents’ property tax base when they took over their parents’ home. In the Bridges’ case, the heirs’ tax bill was based on a 1975 assessment, even though the ocean-front property’s value had significantly increased by the time the kids took it over in 2009.

Between 2009-2017, the heirs owed just $48,000 in property tax, compared to the $300,000 more they would have owed had the house been reassessed, according to an L.A. Times analysis. As a result, L.A. County ­– its schools and government services ­– missed out on hundreds of thousands of dollars in tax revenue. Meanwhile, the Bridges children rented out the Malibu dream home for as much as $15,995 per month, the Times reported.

Statewide, the cumulative loss of property tax revenue from similar cases is in the billion-dollar range.

Now under Prop. 19, according to C.A.R., the legislation's primary backer:

• A home gifted by parents or grandparents must be the heir’s primary residence.
• If you inherit and move into your parent’s or grandparent's house, you can enjoy their old property tax basis, as long as the taxable property value at the time of transfer is not more than $1 million over that original tax basis.
• If the taxable property value is more than $1 million over the original tax basis, you'll be assigned a somewhat higher property tax basis.  (How is the new rate calculated? See the formula in our Q&A below.)
• If you rent it out, you lose the inherited tax basis.

Common questions about Prop. 19 intergenerational transfers:

Q: Should I hurry to amend my estate plan before Feb. 16 so my heirs don’t miss out on current intergenerational transfer tax benefits?

A: A recent article by the San Francisco Chronicle noted that parents are rushing to transfer property into an irrevocable trust for their children in an attempt to preserve current tax breaks before they disappear. The thought is that if they transfer property to their children in a trust now, they’ll lock in Prop.13 tax rates for their heirs, who won’t be required to live on the property to qualify for those rates.

As Bay Area estate planning attorney Michelle C. Lerman explained to us:

"With the two holidays right before the deadline, deeds need to be recorded by Feb. 11.  With appraisers and attorneys swamped, only a very few will have enough time to complete the planning and qualify under the pre-Prop. 19 rules."

Michelle is one of those attorneys inundated with client requests. "This is a huge issue for people who own real estate, especially for people who own their own a home or vacation properties that they hope will stay in their family for generations to come," said Michelle, partner at Lerman Law Partners.

To reemphasize: Don't procrastinate. If you plan to record a deed before the law goes into effect on Feb. 16, remember that Feb. 15 is Presidents' Day, a legal holiday when most city and county offices are closed. As the San Francisco Assessor-Recorder website warns: "We expect a high volume of document submissions during that time, any discrepancies or errors found in the process may require additional time to clarify or correct, which may cause further delay on the recording timeline. Early recording is highly recommended."

If you have questions about what steps to take, talk to your trusted estate planner or tax advisor as soon as possible.

Q: What if I want to pass my primary house to my children, but the property's market value has grown by more than $1 million since the home was last assessed? Will my kids have to pay higher property taxes?

A: Yes. For transfers after Feb. 15, it will be more expensive for your children to own the property. The new taxable basis will be the assessed value of the property at the time of transfer minus $1 million, according to C.A.R.

Q: What does Prop. 19 say about transferring other kinds of property to family members?

A: Prop. 19 specifically eliminates a provision that allowed parents and grandparents to transfer secondary property (like a vacation home or rental property) to heirs and exempt up to $1 million in assessed value.

Q: Will Prop. 19’s new intergenerational transfer rule impact the state’s housing inventory?

A: We asked Michelle what she thought. She predicted that children who no longer benefit from their parents’ low property tax base would be more likely to sell the family home.

“That could generate more housing supply in the coming years," she said.

Tax Basis Portability

The second part of California's Prop. 19 allows homeowners who are at least 55 or severely disabled or lost their primary residence in a natural disaster to transfer the primary property's taxable value to a replacement property anywhere in California.

The benefit for longtime homeowners is they don’t have to give up the low property tax basis from their old home when they sell it and buy their next house, which in today's market will likely have a much higher assessed value.

With California suffering a severe housing shortage, proponents like C.A.R have said they hope Prop. 19 will encourage and enable older Baby Boomers to sell, thus increasing the inventory of homes for younger families to purchase.

Common questions about tax base portability:

Q: How do seniors especially benefit from Prop. 19’s tax basis portability rules?

A: Prop. 19 allows seniors, severely disabled residents, and folks whose home was destroyed by wildfire or other natural disaster to transfer their primary residence's taxable value to a replacement residence anywhere in California within two years, according to C.A.R.'s guide.  Seniors and residents with disabilities can transfer up to three times. There doesn't appear to be a similar limit for natural disaster victims (of course, we'd hope no one goes through such tragedy more than once!)

Q: Does the replacement home need to be of equal or lesser value to qualify for tax basis portability?

A: No, according to Prop. 19 wording and the California State Board of Equalization guide.

Q: What if the replacement home has a greater assessed value? Will I pay higher property taxes?

A: Yes. The difference between the original home's sale price and the replacement home's purchase price is added to the original assessed value to calculate the adjusted tax basis.

Here's an example from Sean Bellach, C.A.R.’s government affairs representative: Let’s say you sell your longtime home, which had a taxable value of $250,000, for $800,000. Then you buy a  home assessed at $850,000. Here's how the new tax basis would be calculated:

• First, find the difference between the old home's sale price and the replacement home's purchase price: $800,000 (sale  price) - $850,000 (purchase price) = $50,000 difference
• Next, use that number to determine the replacement home's new tax basis: $50,000 (difference) + $250,000 (former home's original tax basis) =  $300,000
• So, the taxable value of the new property would be $300,000.

 

Last thoughts

As you can see, Prop. 19 is quite complicated, and you have limited time to act before its implementation if you want to avoid certain changes.

This article is intended to provide general information and is not intended as a substitute for individual legal advice. We urge property owners to seek counsel from a licensed real estate attorney, tax advisor, or estate planner. Abio Properties has not and will not verify or investigate information provided by third parties.

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Abio Properties is a boutique real estate agency with offices in Oakland, Lafayette, and Walnut Creek. To learn more, contact us at 888-400-ABIO (2246) or [email protected].