California’s Proposition 19, which passed in the 2020 general election, took full effect on April 1, 2021. The state constitutional amendment is also known as The Home Protection for Seniors, Severely Disabled, Families, and Victims of Wildfire or Natural Disasters Act.
Under Prop. 19, a California primary residence’s owner who is over 55 years of age, severely disabled* or a victim of a wildfire or natural disaster* can transfer the base taxable value of their primary residence to a replacement primary residence anywhere in the state. By doing so, they can avoid some or all of the higher property tax that might accompany the purchase of a primary home in 2021 or later.
Several sources, including the California State Board of Equalization and the California Association of Realtors, outline information about Prop. 19. But agents and brokers whose clients are curious may appreciate a quick-reference guide to some questions clients may ask.
Sellers or buyers may ask, or need to know:
What is the “base taxable value” of my primary residence?
In the simplest terms, the base taxable value of a primary residence is defined as the property’s value during the initial purchase year, plus inflationary adjustments.
For example: Let’s imagine that the Smiths, a married couple in California, purchased a detached, single-family primary home in January of 2001 for $400,000. At the time, one of the Smiths was 37 years old and the other was 29.
After 20 years, the Smiths’ annual taxes were still determined by that $400,000 base value plus up to 2% per year in inflationary adjustments to that base value.
What are inflationary adjustments?
The base taxable value of a California residence may increase or decrease annually by a small percentage, but will not increase more than 2% per year. The percentage increase in base value may differ by county or municipality, depending on local and regional factors.
For the sake of illustration, let’s assume that the base taxable value of the Smiths’ home increased from $400,000 in 2001 to $550,000 by 2021.
Working with a 1.1% tax rate on that $400,000 to $550,000 range of base taxable value, their annual tax payment would have increased over two decades from about $4,400 to about $6,050.
How can we benefit from Prop. 19?
The way to do so is to buy another house in California. We will cover some other, less clear-cut ways in a separate article.
Does our next house have to be less expensive?
The Smiths sold their home in March to new owners for $800,000. To take advantage of Prop. 19, they will purchase their next home after April 1, 2021.
Prop. 19 allows the Smiths to purchase a home higher in value than their previous home and still reap tax benefits. Because at least one of the Smiths is now over the age of 55, they do not have to worry about paying higher taxes on the first $800,000 of their next home.
If they purchase a $1 million replacement home, the $550,000 base value of their previous home will apply to the first $800,000 of the replacement home. Their price difference is then added to the transferred base value, bringing their new base taxable value to $750,000^
Over time, taxes will be on base value increases to both the $550,000 base value and the secondary $200,000 base value.
How soon do we have to purchase our next home?
Fortunately, there’s no rush. To qualify to transfer the base year taxable value of their primary residence, people who qualify under Prop. 19 have up to two years to purchase the next house.
In the case of displacement by natural disaster or the need to move because of significant disability, this time allows the seller to find the best possible replacement home in California to suits their needs. This two-year window applies even if the replacement primary residence is of a greater or lesser than the initial primary residence.
Does base taxable value transfer to heirs?
This question has more than one answer and begs another article describing the nuances of Prop. 19. You’ll find that article soon in this space. In the meantime, you can advise clients to consult with attorneys and accountants. They might consider forming or updating a living trust that holds all assets, including real estate.
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* as defined, per https://www.boe.ca.gov/proptaxes/pdf/lta20061.pdf
^ per page 2 of https://www.boe.ca.gov/proptaxes/pdf/lta20061.pdf
References:
https://www.boe.ca.gov/proptaxes/pdf/lta20061.pdf
https://leginfo.legislature.ca.gov/faces/codes_displayText.xhtml?lawCode=CONS&article=XIII+A
