California’s Prop 19 adds new laws surrounding real estate sales and property taxes throughout the state. We previously tackled California Proposition 19 and the current law as it related to the estate planning component of the legislation. This aspect of Prop 19 took effect on February 16, 2021, in which certain limitations have now been placed on inherited property for tax reassessment.
Equally important in Prop 19 is how the law will benefit older California residents who wish to sell their existing homes. The law provides more flexibility for retirees to move freely throughout the entire state multiple times and carryover their existing property tax basis (with certain caveats which we explain further in this post). While you might also want to discuss specific questions you have with your financial advisor, we will explain Proposition 19 and how it might affect you. We will also unpack the pros and cons of Prop 19 so you can better understand a potential move as part of your retirement planning.
Prop 19 is designed to make it more affordable for retirees or older homeowners to sell their primary residence and move to another part of California. Set to begin April 1, 2021, eligible California properties may be sold and enjoy a property tax base transfer. That means you can carryover the same property tax basis when you move throughout the state.
Prop 58 also allowed certain homeowners to avoid property tax reassessment and save money by using their previous home’s assessed value, only if they moved within the same county. Under Prop 19, there’s an expansion of how this works that allows eligible homeowners to transfer their tax basis not just within the same county, but anywhere across California. Homeowners will also be able to move up to three times and carry their property tax basis (subject to certain restrictions), not just once. Finally, if they purchase a much more expensive home, they will be subject to a blended assessed tax value. The law is meant to promote more real estate transactions and ease the property tax burden of such on older Californians.
Prior to the passage of Prop 19, Prop 58 allowed for this tax basis transfer, however with many more limitations. Here’s a brief overview of what’s changed with Prop 19.
Eligible homeowners include those who are over 55 years old, disabled, or lost their home in a natural disaster.
Let’s unpack each of these new requirements so you know exactly how and when you can take advantage of Prop 19.
One of the major benefits of the new Prop 19 is that the property eligibility has widened substantially compared to Prop 58. As noted above, Prop 58 only allowed an eligible homeowner to take advantage of the tax basis transfer if the new property was in the same county as the old home. Some counties within the state also had intercounty ordinances in place that allowed for the assessment transfer, however that was limited to just 10 total counties in and around Los Angeles.
Now, the replacement home can be anywhere in the state of California. This gives older residents more flexibility in moving rather than feeling constricted to one area because of financial concerns.
However, as with Prop 58, Prop 19 keeps the requirement that the property in question must be your primary residence. Rental properties and vacation homes are not eligible for this property tax benefit.
There’s also a time limit to be met in order to take advantage of the assessment transfer. You have two years from the time of the sale to purchase a replacement home or new construction on a residence. Otherwise, you forfeit your ability to take advantage of Prop 19.
The next major change is an expansion of the value limits. In terms of California property values, the new law allows homeowners to buy a replacement home that is worth more than their old home. However, the increase in value is added to the transferred taxable value of the old home.
Previously under Prop 58, the replacement home had to be of equal or lesser value than the sale of the existing home. There was some room to adjust for real estate appreciation if the homeowner didn’t purchase a home right away:
When Prop 19 goes into effect, you can buy a more expensive home and utilize a blended property tax assessment. The tax base formula subtracts the value of the old home from the value of the new home, then adds the old tax base.
Here’s how that looks in a hypothetical situation:
Say you owned a home in San Diego for the last 30 years and your property tax assessed value is $300,000. If you sold your home for $1 million and purchased a new home anywhere in California for $1 million or less, you can transfer your previous taxable value to the new home (e.g. $300,000). That will be its taxable value. However, if you want to upgrade to a $1.5 million home, your new home’s taxable value will be $800,000. The calculation is the difference in increased value between the two homes ($500,000), plus the original tax value ($300,000), equals $800,000. It’s a higher property tax assessment than before, but it’s still substantially less than what the property taxes would have been on the new home.
Prop 19 expands the limit on how many times an eligible homeowner can use the tax assessment transfer. If you qualify, you can utilize this property tax relief provision up to three times, whereas Prop 58 only allowed it to be used one time. You could, however, use it once based on age and once based on a subsequent disability.
Now you may use it up to three times if you qualify under the age or disability requirements. You can still only utilize this provision once if you’re buying a home under the disaster relief requirements.
This gives older residents more flexibility in moving for a variety of reasons later in life. Perhaps you want to downsize after your children move out. Or you may want to be closer to family in another part of the state or move closer to a healthcare facility. With an expanded number of uses, you can worry less about when is the right time to make that move. Instead, you can make a more holistic decision that isn’t encumbered by fear of excessive property taxes.
There are a lot of details packed into Prop 19, some which help older California homeowners and some which hurt them — especially when it comes to estate planning. The biggest benefit, of course, comes with the expansion of property tax savings for those who are 55 years or older. The new law makes it easier to utilize the tax relief provision throughout the whole state and with blended assessments for a new property at a higher value. Plus, you can use the provision up to three times.
On the downside, Prop 19 has now placed stricter limits on how one can inherit property in California. If you plan to leave real estate to your children, passing the property tax basis to them is now much more limited. For instance, the child (or children) must use the property as their principal residence immediately after death or gift in order to avoid triggering a property tax reassessment. Even in this situation, there’s a new cap on the assessed property tax value exclusion, which is set at $1 million. Additionally, commercial and rental properties are now completely excluded from this provision.
While Prop 19’s provisions for seniors goes into effect on April 1, 2021, the administrative rollout is still underway. You’ll need to apply for the benefit by filing a claim with the county assessor. Start by reaching out to your new county’s assessor’s office to find out how to apply and what documents are required to demonstrate the new assessed value. Your D&Y Wealth advisor can also help you track requirements as they’re announced.
Prop 19 certainly brought along sweeping changes to property taxation for older California residents. If you’re unsure of how or when to take advantage of the new provisions, reach out to D&Y Wealth for help. Our advisors follow the latest legislation to ensure our clients are maximizing their relief options.
We are also happy to collaborate with your tax CPA when it comes to planning for a transaction. In fact, working with all of your financial services professionals (like your estate planning attorney) is one of our signature services.
Change can be good, but it’s also important to make sure you fully understand the new requirements. Real estate decisions are a crucial part of your overall financial plan. We often run various retirement projection scenarios for clients based upon potential real estate transactions.
Contact Dowling & Yahnke Wealth Advisors today to discuss your future goals and how Prop 19 impacts your decisions for both real estate and your overall financial plan.