Prop 19: A Game-Changer for California Homeowners and Heirs

Dax Nollenberger
- Dax Nollenberger

Prop 19: A Game-Changer for California Homeowners and Heirs

Are you a senior citizen in California looking to downsize or move closer to family members? Or maybe you’re a homeowner with investment properties that you’re planning to pass down to your children or grandchildren? In either case, Proposition 19, a bill passed in November 2020, is a significant change to California’s property tax laws that you need to be aware of.

Let’s start with a hypothetical, let’s say that you bought your Santa Cruz home in 1980 for $150k and have owned it since. Your children have grown up, left the nest, and are now beginning to start their own families. They live in San Diego now and you want to watch your grandchildren grow up. Wouldn’t it be nice if you could take your artificially low property tax and transfer it to a home in San Diego? With Prop 19, you can. 

In this blog, we will take a closer look at Proposition 19, its history, benefits, and drawbacks for seniors and heirs, and its long-term implications.

A Brief History of California Property Tax Laws

Before we dive into Proposition 19, let’s briefly review some previous bills that impacted property tax laws in California. 

Before 1978, real property was appraised every 1-5 years. This is actually how most of the country operates its property taxes. Well, you could imagine the impact that continuous re-appraisals would have had on our property taxes! Our home values have increased exponentially. If property taxes followed suit, many homeowners would have been priced out of their own property. Luckily, Californians saw the writing on the wall. 

Proposition 13, passed in 1978, limited property tax increases to no more than 2% annually, based on the property’s assessed value when it was purchased. Additionally, properties were reassessed only on change of ownership or when new construction was completed. 

Proposition 58, passed in 1986, allowed parents to transfer their property’s assessed value to their children, whether it was a primary home or not. A principal residence of any value could be transferred to the children and the first $1M of assessed value for non-residences (such as apartment complexes, commercial buildings, or vacation homes). 

A huge benefit for heirs, this allowed children to inherit a portfolio of assets and not incur huge spikes in property taxes. 

Proposition 60, passed in 1986, allowed seniors aged 55 and over to transfer the assessed value of their primary residence to a new home in the same county, so long as the new home was of equal or lesser value than the original home.

This was a great benefit for very few. Limited to only in-county transfers, many 55+ seeking a new place to live were forced to take on a significantly higher property tax base elsewhere. 

Proposition 90, passed in 1988, extended the benefits of Proposition 60 to seniors who moved to a new home in a different county, so long as the new county agreed to participate in the program.

While great in theory, only 10 of California’s 58 counties participated in Proposition 90, limiting the program’s usefulness for many seniors.

Now, let’s move on to Proposition 19 and its impact on property tax laws in California.

The Benefits of Proposition 19 for Seniors

For seniors aged 55 and over, Proposition 19 offers significant benefits. The bill allows seniors to transfer their property tax base to a new home anywhere in California, regardless of the new home’s value. This means that seniors can downsize or upgrade or move closer to family members without facing a significant increase in their property taxes. Additionally, you can transfer your tax basis three times in your lifetime instead of just once previously. 

Moreover, Proposition 19 eliminates the previous restriction that limited transfers within the same county. Seniors can now transfer their property tax base to a new home anywhere in California, making it easier to move to a new location while still preserving their property tax benefits.

So, what happens if you buy up?

Well, you still end up saving a significant amount in property taxes. Only the difference in home values is reassessed. In the example above, that means you are paying half of what you would be if your property was fully reassessed. 

What happens if you downsize?

Money saved is money earned. Your original assessed value will have a big impact on how much you can downsize and still benefit. In the example above, the owner is going to save nearly $6000 in taxes. 

The Downsides of Proposition 19 for Heirs

While Proposition 19 offers significant benefits to seniors, it also has some drawbacks for heirs. One of the most significant drawbacks is that it limits the ability of heirs to inherit property at the same property tax rate as their parents. Under Proposition 19, heirs who inherit property that is not their primary residence will have the property reassessed to its current market value when it is transferred.

The key distinction here is “primary residence”. The child must live in the home as a primary residence when inherited in order to avoid reassessment. If they don’t move in, it’s reassessed. If they move in and then move out two years later, it’s reassessed then. 

This means that heirs who inherit investment properties or rental properties from their parents will be subject to higher property taxes. This could make it more difficult for heirs to keep these properties, and they may have to sell them to cover the increased property tax bills.

Let’s look at this in action. 

The Long-Term Implications of Proposition 19

Proposition 19 has long-term implications for seniors and their heirs in California. While it offers some significant benefits, such as the ability for seniors to transfer their property tax base to a new home anywhere in California, it also has some drawbacks for heirs who inherit properties that are not their primary residences.

As a result, it is important for homeowners to carefully consider the benefits and drawbacks of Proposition 19 before making any decisions. If you’re a senior looking to downsize or move to a new location, Proposition 19 could be an excellent option for you. However, if you’re planning to pass down investment properties or rental properties to your heirs, it is important to be aware of the limitations that Proposition 19 imposes on inherited properties.

FAQ

Q. Do you need to sell or buy first?

A. It does not matter. The only thing that matters is that you must do both within two years.

Q. When do you need to file by?

A. You must file within three years of the first transaction.

Q. What if only one of the spouses is 55+?

A. You’re eligible. Only one of the spouses needs to be 55+.

Q. What if my property is a multi-unit? 

A. Only the unit that is to be used as a primary living space avoids reassessment. The other unit(s) are reassessed. 

Q. Will I get refunded while waiting for a claim?

A. Yes. You will get refunded for the difference between your assessed taxes and what you pay during processing. 

Q. Must I pass in order for my kids to receive this benefit?

A. No. You can pass the benefit to your kids. However, the benefit can’t then be used by you as well. 

Q. How do I apply?

A. You must buy and sell before you apply for the exemption. To apply, go to the County Assessor’s Office in the bought of your new property. 

Want to learn more about Prop 19? Let me be your guide. 831-227-5847.

Thanks for reading. – Dax 

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