Proposition 19: The Good, The Bad, and The Really Ugly
Proposition 19 (“Prop. 19”) offers a mixed bag of results for California property owners and taxpayers. Some of those results are good, some are bad, and some are really ugly.
First, “The Good”:
Prop. 19 expands the benefits provided under 1986’s Proposition 60 to California homeowners who are looking to change their primary residences, provided they fall into one or more of the following three categories: (1) they are 55 years old or older; (2) they are disabled; or (3) their homes suffered damage in wildfires (“Qualified Homeowners”). If certain requirements are met, Qualified Homeowner can transfer their current residence’s assessed value to their next residence (up to three times). If the value of a new home exceeds the Qualified Homeowner’s current tax base, their new tax bill is simply adjusted up to meet the difference between the value of the original home and the new home.
Example: In 1989, Husband and Wife purchased a home in Fullerton, CA. This year, they paid $5,000 for their annual property taxes. Their Fullerton home is worth $1,250,000. They would like to move closer to their grandchildren residing in San Clemente, CA. If they purchase a replacement home for equal to, or less than $1,250,000, they will maintain their current tax base. If they purchase a replacement home for $1,750,000, the first $1,250,000 in value will not be reassessed, but the additional $500,000 in value will be subject to reassessment. Assuming a 1.1% property tax rate, the Husband and Wife will pay the original $5,000 in annual property taxes plus $5,500, for a total of $10,500. In this scenario, the homeowners receive significant tax savings. Without Prop. 19, Husband and Wife would pay $19,250 in annual property taxes on their more expensive new home.
Second, “The Bad”:
Prop. 19 maintains, but severely limits, some property tax benefits, established under 1986’s Proposition 58, for children (and, in some cases, grandchildren) who inherit primary residences or family farms.
Under current law, children can receive real property from their parents without a reassessment of the property tax base, subject to some limitations. This allowed parents to transfer their primary residences to the next generation while allowing that next generation to enjoy the protections from property tax reassessment established under Prop. 13.
Unfortunately, Prop. 19 limits these benefits. In order for the transferee to maintain the property tax base, the property must be used as the “family home of the transferee” or must be a “family farm.”
Depending on the value of the residence, there may be a reassessment on a portion of its value. If the fair market value of the residence being transferred is less than the current taxable value plus $1,000,000, then the property will maintain its original tax base. If the fair market value of the residence is more than the current taxable value plus $1,000,000, then the property will be reassessed to the extent the fair market value exceeds the current taxable value plus $1,000,000.
Example: Mother purchased her primary residence on Balboa Island, CA in 1975. This year, her tax base on the home was $225,000 and she paid $2,500 in annual property taxes. The home is currently worth $5,000,000.
- Mother Transfers the Property to Son: If Son uses the home as his primary residence, he will maintain the current tax base plus an additional $1,000,000 in value (total of $1,200,000) without reassessment. Son’s annual property taxes will be $2,500 on the first $1,200,000 in fair market value, plus 1.1% on the additional $3,800,000, resulting in a total of $44,300 in annual property taxes. However, if Mother transferred the property to Son to be used as Son’s vacation home, the property would be completely reassessed and the new annual property taxes will be $55,000.
- Mother Immediately Transfers Her Primary Residence to Son Under Current Law, Prior to Prop. 19 Taking Effect on February 16, 2021: Son will maintain the current tax base on the property (regardless of whether Son uses the property as a primary residence). Son will pay $2,500 annually in property taxes, resulting in annual property tax savings of $41,800 to $52,500.
Finally, “The Really Ugly”:
Prop. 19 eliminates all currently available Prop. 13 and Prop. 58 benefits on the transfer of non-primary residences (with some exception for agricultural property) to children, resulting in drastic property tax increases for the next generation.
Under current law, children can maintain up to $1,000,000 in assessed property value on real properties (including vacation and commercial properties), other than a primary residence, received from their parents without seeing an increase in property taxes. Unfortunately, Prop. 19 eliminates these protections for all real property, other than primary residences and family farms, resulting in full reassessment.
Example: Same example as above, except Mother’s $5,000,000 Balboa Island home is a vacation property on which she pays $2,500 in annual property taxes. She also owns a commercial property valued at $5,000,000. The commercial property’s assessed value is $565,000 and Mother pays $6,250 in annual property taxes on that property. Under current law, Mother could transfer the vacation home and commercial property to Son without causing a property tax reassessment. In this scenario, Son continues to pay $8,750 in annual property taxes. However, after February 15, 2021, under Prop. 19, these transferred properties will be reassessed at fair market value upon transfer, resulting in a full property tax reassessment. Using the 1.1% tax rate in the above examples, the property taxes on these properties will increase from $8,750 to $110,000 annually.
The Clock is Ticking:
If the current owners of real property and their children intend to hold property well into the next generation, they should immediately consider making a transfer prior to the law taking effect on February 16, 2021. Failure to make these transfers now will result in increased property taxes and perhaps force the next generation to sell these properties.
If you feel this issue affects you and your family, immediately call the attorneys at Vogt, Resnick & Sherak, LLP to set up an appointment.