On November 3, 2020, California voters approved Proposition 19, The Home Protection for Seniors, Severely Disabled, Families, and Victims of Wildfire or Natural Disasters Act. This law provided major changes to Proposition 13, which was passed in 1978, and limits property taxes to 1% of the assessed value of a residential property as well as 2% yearly assessment increases based on a CPI adjustment.
We’ll discuss the key features of the property tax system created by Prop 13 and how they will be changed by Prop 19.
In this blog, you’ll learn:
- Background on Proposition 19
- Proposition 13 and the Property Tax System
- How Does CA Prop 19 Change the Property Tax Calculation?
- Proposition 19 Compared to Old Law
- Will More People 55 and Older Sell their Homes?
Information came directly from these two websites below. We encourage you to visit these resources to learn more and reference the latest developments:
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More Incentive to Stay in California for 55 and Older
But where would I go? A question we hear often when those easing closer to retirement consider selling the family home and settling in a new location. Leaving California has been an option with growing interest as among other factors, taking on high property taxes for a new home could be a non-starter for some retirement budgets.
On the flip side those cashing-in on hard earned stock options want to buy a house close to where they work or near more urban centers, without a long commute, but there are very few homes available – even when affordable. The 55 and older are hanging on to their homes not ready to transition creating pressure on home inventories and keeping many in their apartments with growing rent prices with no opportunity to gain equity.
Ten California counties permitted the transfer of property tax as an incentive for CA residents to move to their locale. With the passage of Proposition 19, this option is now expanded to all 58 counties in California and those still working have options to work from home and move with their tax base to anywhere in the “Golden State”.
Proposition 19 Background
Prop 19 was passed on November 3, 2020, to make significant changes to the property tax system in California that was established in 1978, by historic Prop 13. Prop 19 narrowly passed with 51% of the vote and was a big victory for the California Association of Realtors, who had been recommending similar laws for years to make it more affordable for Californians who are 55 and older, to sell their homes and move to other parts of the state.
Unfortunately, the problem with Prop 19 is that portions of the language are ambiguous, unclear, and even conflicting. It did not clearly explain how some situations would be handled, leading to confusion by California residents and the County Assessors, who must implement these changes.
The process to add clarity to a new law passed by the voters through a proposition can be amended and clarified by different areas of the government:
- California State Legislature can pass bills to provide more detail
- California State Board of Equalization can issue further guidance
- County Assessors in each of the 58 counties in California meet regularly to work out the final details on how these new regulations will be administered across the state
These organizations are currently working through their processes to provide the details necessary to fully implement Prop 19. They have stated they are not sure when they will have all of this completed. To understand the changes, let’s start by reviewing Proposition 13.
Proposition 13 and the Property Tax System
It is the role of the County Assessors to administer the assessment of your property, including real property (i.e., land and buildings). It helps to understand the basis of Proposition 13, passed by the voters in 1978.
Let’s start with a few terms used to calculate property tax under Prop 13:
- Assessed Value – is the value of real property that is determined by the County Assessor at the time property is purchased, generally the sales price. The assessed value will then become the “base year value”
- Market Value – is the market-driven price of any property at a given price and time, or what the price of a home could be sold for
Prop 13 limits property taxes to 1% of the assessed value of the property, not the market value. It also limits assessment increases to 2% yearly based on a CPI adjustment. Property taxes are only reassessed for a change in ownership or due to new construction.
Prop 13 Transfer Exclusions from Reassessment:
- Parent to child
- Grandparent to grandchild
- Seniors that are 55 years or older
- Disabilities
- Natural disasters
If a homeowner has been in their home for several years, the change in property tax for a new home purchase could be sizeable. It is not uncommon for a family in a home for 25 years to have a property tax bill of $6,000 compared to a replacement home tax bill of comparable home size, or even smaller, to be $20,000+ a year.
How Does CA Prop 19 Change the Property Tax Calculation?
Proposition 19 adds new provisions for a base-year value transfer of a primary residence for persons 55 or older, severely disabled, or for victims of wildfires or natural disasters. It also changes the provisions of the parent-child and grandparent to grandchild exclusions.
Base Year Value Transfer for Persons 55 and Older or Disabled
Effective April 1, 2021, the following new rules took effect:
- Property must be your principal residence
- Must purchase or newly construct your new home within two years of the sale of your original home
- Can be anywhere in California
- You can do this transfer 3 times during your lifetime
- If the full cash value of the replacement home is greater than the full cash value of the original home, the difference in the full cash value will be added to the transferable tax value
- You must apply for a taxable value transfer with the County Assessor where your new replacement home is located
Let’s review an example from the California State Board of Equalization:
At the time of the transfer, a single-family residence has a taxable value of $300,000 and a fair market value of $600,000.
1. Calculate the difference in replacement value if replacement home value is $700,000:
2. Since the difference in market value of the replacement is greater than the original, the transferable tax value is adjusted by the difference in value:
3. If the replacement home value was less than the fair market value of the original home, then the transferable tax value would be set to the original home’s taxable value of $300,000.
Base Year Value Transfer for Victims of Wildfire or Natural Disaster
Also, effective April 1, 2021, the following rules took effect:
- There is no age limit to take advantage of transferring taxable value
- Property must be your personal residence
- Must purchase, or newly construct a new residence, within two years of the sale of your original home
- Can be anywhere in California
- There must be a wildfire or natural disaster as declared by the Governor
- The home must be substantially damaged (more than 50% of the improvement value of the residence)
Any amount above the full cash value right before the wildfire or natural disaster will be added to the transferred value
Parent-Child and Grandparent-Grandchild Exclusion
Effective February 16, 2021, the rules are:
- Must be the primary residence of the parent and continue as the primary residence of the child (or grandparent and grandchild but parents must be deceased at time of transfer)
- The value limit is the current taxable value (not market value) plus $1 million (as adjusted annually beginning in 2023)
- Family homes and family farms are included
- No other real property can be excluded other than principal residences and family farms
- Must claim homeowner exemption, or disabled veteran exemption, and be filed within one year of transfer
Let’s review an example from the California State Board of Equalization:
At the time of the transfer, a single-family residence has a factored base year value (FBYV) or taxable value of $300,000 and a fair market value of $1,500,000.
1. Calculate the sum of FBYV plus $1,000,000:
2. Since the fair market value is greater than the excluded amount, calculate the difference between the fair market value and the excluded amount:
3. Thus, the adjusted base year value is $500,000
Proposition 19 Compared to Old Law
Source: California Board of Equalization
Prop 19 Tax Calculator
The County Assessor for Santa Clara County now has a calculator to estimate the property tax value of transferring your base value from original to the replacement property. Just type in the address of your current property, the projected purchase date of your new home, projected purchase price, projected sales price of your original home and it’s original value. You can even print the Assessor’s Parcel Map for your current home.
Will More People 55 and Older Sell their Homes?
Prior to the passage of this law, only 10 counties allowed the transfer of base year value of a residence into their county. They were Alameda, Los Angeles, Orange, Riverside, San Bernardino, San Diego, San Mateo, Santa Clara, Tuolumne and Ventura. With the passage of Prop 19, the base year value of a home for persons over 55 can be transferred to all 58 counties in California. This has the potential to allow more people over 55 to sell their home and move to other areas within California.
With the increased focus on work-from-home that started during the pandemic, will people over the age of 55 that are still working, chose to sell their homes in the more expensive urban areas and move to less expensive urban areas? It will take us a few years to find out.
The final language of these new regulations is still being developed by the State Legislature, California State Board of Equalization and County Assessors. We recommend you monitor the situation and contact your tax professional and local County Assessor’s office, for the latest Prop 19 developments, and how the rules may impact your specific situation.
No matter what state you reside, your home is one of your most valuable assets in your portfolio. We encourage you to talk with your Wealth Manager to work through the financial scenarios to maximize your investment and a location for your retirement years that suits your personal goals.
Financial Journey Partners is Here to Help You
Our Financial Journey Partners office is based in San Jose, California. We have clients that live in many states across the country. If you have questions about your investments or financial situation, call us to schedule time to talk about your specific situation.
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