This is a question I get often from clients. Of course, with important tax decisions it's always best to consult with your tax professional.
Key Changes in California’s Proposition 19 vs. Proposition 60/90
California has long been a state with complex property tax laws, particularly when it comes to transferring property and maintaining tax benefits. Proposition 19, passed in 2020, brought significant changes compared to the older Propositions 60 and 90. As a mortgage broker, real estate agent, or homeowner, it’s important to understand how these laws differ, especially in regard to tax assessments, property transfers, and inheriting properties. Below is a breakdown of the key changes.
1. Transfer of Property Tax Base for Homeowners Over 55
Proposition 60/90: These measures allowed homeowners aged 55 and older to transfer their property tax base to a new home of equal or lesser value, but it was limited to one transfer and only within certain participating counties (Prop 60 was within the same county, and Prop 90 allowed transfers between participating counties).
Proposition 19: This expanded the ability for homeowners aged 55 or older, severely disabled, or victims of natural disasters to transfer their tax base up to three times to anywhere within California, and even allows it for more expensive homes (with adjustments made to the tax base). This provides much greater flexibility for seniors looking to downsize or relocate while preserving their lower property tax rate.
Key Change: Prop 19 removes geographic limitations, increases the number of times a transfer can occur, and allows for the purchase of more expensive homes with partial tax adjustments.
2. Inheritance and Property Transfers Between Parents and Children
Proposition 60/90: Prior to Prop 19, under Propositions 58 and 193, parents could transfer property to their children (or grandparents to grandchildren) without a reassessment, as long as the home was used as the child’s primary residence, and there was also an exclusion for other types of inherited properties such as rental or vacation homes.
Proposition 19: This rule tightened under Prop 19. Now, children can only keep the original tax base if the property becomes their primary residence. Furthermore, if the property has significantly appreciated, there is a limit on how much of the original tax base can be excluded. Any value over $1 million from the original base value will be reassessed.
Key Change: Prop 19 restricts tax benefits for inherited properties that are not used as the recipient’s primary residence and caps the exclusion limit for appreciated properties.
3. Natural Disaster Victims
Proposition 60/90: There were no specific provisions for victims of natural disasters.
Proposition 19: It allows victims of wildfires or natural disasters to transfer their primary residence’s tax base to another home anywhere in the state. This provides financial relief for homeowners displaced by fires or other disasters.
Key Change: Prop 19 introduces a benefit for natural disaster victims to carry over their property tax base to a new home, regardless of location in California.
4. Impact on Revenue for Local Governments and Schools
Proposition 60/90: These laws were relatively neutral in terms of their revenue impact, as they didn’t introduce broad new exclusions or tax shifts.
Proposition 19: Prop 19’s changes are projected to bring in additional tax revenue by closing loopholes, particularly around inherited vacation homes and rental properties that no longer enjoy property tax exclusions. This additional revenue is earmarked to support wildfire response efforts and local government budgets.
Key Change: Prop 19 is designed to increase tax revenue by reducing tax benefits for inherited properties not used as primary residences, while expanding benefits for homeowners over 55 and victims of natural disasters.
How These Changes Impact Homeowners and the Real Estate Market
For real estate professionals and mortgage brokers, the implications of Prop 19 are significant:
More Flexibility for Seniors: With expanded rights for seniors to transfer their property tax base, there may be an increase in property sales and purchases from older homeowners looking to downsize, upgrade, or relocate.
Fewer Tax Breaks for Inherited Properties: Families inheriting properties may now face reassessment and higher taxes unless they plan to live in the home themselves. This may lead to more sales of inherited properties, particularly in high-value areas where the $1 million exclusion cap will be exceeded.
Increased Transactions from Natural Disaster Victims: Homeowners affected by wildfires and other natural disasters can transfer their property tax benefits, which may result in more transactions and opportunities in the real estate market.
Final Thoughts
California’s Prop 19 represents a major shift in the state’s property tax laws, providing more opportunities for older homeowners, while tightening the rules around inherited properties. As a mortgage broker or real estate agent, these changes can be leveraged to educate clients on maximizing their tax benefits, especially when looking to relocate or downsize. By staying informed, you can help your clients navigate these complex laws and make the most of their property investments.
References:
California State Board of Equalization: Prop 19 Overview
By understanding the key differences between Prop 19 and its predecessors, you’ll be better positioned to offer guidance to your clients and ensure they benefit from the current property tax landscape.
This post is for entertainment purposes and should not be misconstrued as tax advice. Please consult with your CPA before making any major moves as the tax landscape is constantly changing.
Comments