January 28, 2021
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Last November, California voters passed Proposition 19, making two major changes to the state’s property tax laws. The first change impacts the property tax on transfers of property between parents and children, and the second impacts the property tax for transfers made by homeowners with severe disabilities or over the age of 55.
Let’s break these down, one at a time.
Changes to Property Tax Law Affecting Parent-Child Transfers of Real Property
As of February 16, 2021, parents can transfer their principal residence to their children (either during life or at death), but if the value of the property has increased more than $1 million, the property will be taxed at the new fair market value, less $1 million.
To benefit from the $1 million exclusion, the property must be the child’s principal residence.
It helps to explain this with an example.
Imagine that your home has an assessed value of $750,000 and a market value of $3.25 million. Under prior law, you could transfer the home to your child or children, and the property tax assessment value would be $750,000.
Under Proposition 19, you can still transfer your home to your child or children, but only $1 million of increased value will be exempt from reassessed property tax. In other words, if the property has increased more than $1 million, the new assessed value will be used, minus $1 million.
Using the same example as before, the property’s assessed value will now be $2.25 million.
Note that the law changes if the property is not the child’s principal residence. As of February 16, the first $1,000,000 of value will no longer be excluded from reassessment when parents transfer other types of real property, such as vacation homes or rental property, to their children. Under Property 19, a transfer of property for a non-principal-residence automatically triggers a reassessment
Changes to Property Tax Law Affecting Severely Disabled Homeowners and Homeowners Over 55
As of April 1 of this year, Proposition 19 lifts some of the restrictions governing transfers of assessed value from one residence to another residence for homeowners age 55 or older, and for severely disabled homeowners.
The law remains unchanged in this respect: Homeowners who are at least 55 or who are severely disabled can transfer the assessed value of their principal residence, so long as the replacement principal residence is purchased or newly constructed within two years of sale of the original principal residence. In layman’s terms, if you are at least 55 or severely disabled, and you purchase a new home, you can transfer the assessed value of your old home within a two-year time frame. This means that the new home will not be assessed and you will pay property tax based on your old home’s assessed value.
That said, the old law had a few constraints that have been replaced:
1. The new home had to be of equal of lesser value,
2. The new home had to be in the same county or another county that permitted intercounty transfers of assessed values, and
3. The homeowner could take advantage of this exclusion of reassessment only once.
Under the new law:
1. The new home can be of higher value, but any higher value must be added to the assessed value. For instance, if your old home’s assessed value was $1 million, and the fair market value is $2 million, and you purchase a home worth $2.25 million, the assessed value of your new home would be $1.25 million.
2. The assessed value can be transferred to a home anywhere in California.
3. The homeowner can take advantage of this exclusion of reassessment three times.
Note that additional legislation is likely forthcoming to address some of the questions related to Proposition 19. That said, if you have a property that you believe will fall under the jurisdiction of Proposition 19, contact us or your other tax, legal, or financial advisors so that you can best position yourself and/or your children.