And here comes Proposition 19 - Part-1: Primary Home
Updated: Feb 4, 2021
Riding on the ballot for one of the most momentous elections of the country, and winning by a slim margin of 2.2%, Proposition 19 is here with us!
This is a complex piece of regulation that impacts property tax benefits in California. It essentially makes changes to two existing statewide property tax saving programs:
- It replaces Proposition 58 (1986) and Proposition 193 (1996) by limiting parent-and-child transfer and grandparent-to-grandchild transfer exclusions ( See current Propositions 58/193 here). This portion of Proposition 19 comes into effect on February 16, 2021.
- It replaces Proposition 60 (1986) and Proposition 90 (1988) programs for home transfer by seniors and severely disabled persons (See current Propositions 60/90 programs here). This portion of Proposition 19 is effective April 1, 2021.
Considering the complexity and multi-dimensional impact of these changes, I will cover these over more than one blog. In this blog, I will focus on transfer of primary home between parents and children.
Real property in California is generally assessed at market value only when it changes hands. And this assessed value is the magic number that determines your property tax bill.
In 1986, California voters passed Proposition 58 that allows property to be transferred between parents and children (both-way) without reassessment if certain conditions are met. What this means is that if all conditions are met and the property passes from parent to child, the child gets to maintain the parents’ property tax. This applies to a transfer from child to parent as well. However, for simplicity sake, we will assume that the transfer is from parent to child. This law is particularly attractive for properties held for longer periods, and in geographic areas where property prices have appreciated substantially.
Proposition 19 changes these rules on primary home transfers. Here is how it impacts the primary home property taxes:
- It will preserve the exemption on primary residences, but only if the child also uses the home as a primary residence.
- Property tax exemption is limited to the difference between the home’s market value and its assessed value of next $1 million (indexed for inflation). If the difference between market value and assessed value is more than $1 million, the amount over $1 million would be reassessed.
- If the child does not use the home as a primary residence, it would be reassessed at market value.
Let us clarify above with couple of examples. In both the examples, let us assume that parents’ principal residence has assessed value of $1.5 million and property tax of $15,000.
Example-1: Parents’ primary residence has market value of $2.0 million and after transfer, child occupies property as primary residence. In this case, assessed value for child remains $1.5 million (since $2.0 million minus $1.5 million is less than exemption limit of $1 million) and hence, there is no change in property tax.
Example-2: Parents’ principal residence has market value of $3.0 million and after transfer, child occupies property as primary residence. Assessed value for child in this case becomes $2.0 million (since $3.0 million minus $1.5 million is more than exemption limit of $1 million, the new assessed value for the child is $1.5 million plus $0.5 million over the exemption limit). Property tax increases from $15k to $20k.
I will also briefly touch on one twist on primary home scenario – what happens if the property is held in a trust?
In such cases, assessors will “look through” the trust to determine if a change of ownership has occurred.
In revocable/living trusts, grantor(s) of the trust is deemed to be the owner(s) as long as they are living. Since these trusts do not change the beneficial ownership of a property, this will not trigger a reassessment. At the death of the grantor(s), the trust becomes irrevocable and the property is deemed to be transferred to the new beneficiary. This would trigger a reassessment, unless it qualifies for a parent-child, spousal or other exclusion. For transfers through February 15, 2021, current parent-child exclusion will apply. Starting February 16, 2021, Proposition 19 rules will apply.
If the trust is irrevocable, the county assessor will determine the “beneficial owner” of the trust. If the beneficial owner is not the grantor, the assessor may determine that a transfer took place when it was placed in the trust.
And last but not least, what happens if the child decides to sell the property?
When a property is gifted, the cost basis of the donor is transferred to the recipient. On the other hand, when a property is transferred at death, it receives a step-up in cost basis. If the child decides to sell the property, cost basis of the property can have a significant impact on the capital gains taxes due at sale.
Some sources of information on Proposition 19: