This past election, there were a few crucial propositions that affected homeowners and renters in California. Proposition 19 passed, which inherently means:
- Inherited homes that are not used as primary residences, such as second homes or rentals, must be reassessed at market value when transferred
- Eligible homeowners can now transfer their tax assessments anywhere within the state and these tax assessments can be transferred to a more expensive home with an upward adjustment
- People over the age of 55 or with severe disabilities can transfer their tax assessments from one to three times
This proposition affects many homeowners across the state, so we are here to explain what that means for you and your rental property.
Proposition 13 of 1978
To understand what Prop 19 does, you must first understand Prop 13. Prop 13, passed in 1978, restricted the annual property tax increase to no more than 2% or the inflation rate, whichever is less. It prevents reassessment of a new base year value except for when there is a change in ownership or completion of new construction. These rules applied equally to all real estate properties, both residential and commercial, owned by individuals or corporations.
Proposition 58 of 1986
In 1986, an exclusion was added to amend prop 13. Known as the Parent-Child Exclusion, it excluded the reassessment of a property transfer of a primary residence (regardless of value) and $1 million of assessed value of other real property, such as secondary homes or investment properties.
For example, if a parent wanted to transfer their home to a child and that home had a value of $1 million in 1990, they could do so without having to reassess the home. Alone, a parent could transfer up to $1 million in assessed value, but two parents together could transfer up to $2 million.
What does Prop 19 Change?
The passage of prop 19 means that children who inherit their parent’s or grandparent’s home will no longer receive a tax break should they choose to use it as a second home or rent it out. Starting on February 16, 2021, the option to transfer up to $1 million of assessed property that is not the primary residence is completely eliminated.
There are only two ways that a property can be transferred without reassessment: the primary residence being transferred will also become the child/grandchild’s primary residence, or the fair market value of the primary residence at the time of transfer does not exceed the transferor’s assessed value by more than $1 million. Additionally, this new law does not apply to properties held in LLCs or other legal entities.
It is highly recommended to consult with your attorney regarding your properties if you had planned to make this kind of transfer.
Property Transfer for Those Over the Age of 55
Prior to Prop 19, homeowners over the age of 55 or specified disabled persons could transfer their tax assessments to a home of equal or lesser market value in their current county. When this section of prop 19 takes effect on April 1, 2021, they will be able to expand that transfer to homes with higher value and homes that are in a different county. Not only that, but it also allows victims of wildfire or other natural disasters this benefit.
The increase in value must be added to the transferred taxable value of the old home. For example, if they sell their home for $20,000,000 and the taxable value is $10,000,000, they can transfer that taxable value if the home is $20,000,000 or less. If the new home they intend to purchase is $30,000,000, the new taxable value will be the $10,000,000 plus the difference between the upgraded value and the value the current home was sold for.
The eligible homeowner can take advantage of an assessed value transfer up to three times during his/her lifetime. Previously they only had one opportunity to do this.
If you think you may be affected by Proposition 19, we recommend that you consult with your attorney as soon as you can, especially if you are affected by the parent-child transfers.