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Prop 19: What California Homeowners Need to Know

Prop 19 passed in California in November 2020. We go over how this affects the transfer of properties and who it primarily affects.

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.

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Olivia

Content Marketing Manager at Good Life Property Management

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Hey guys, Adam Manley here from Good Life Property Management bringing you guys another video today. Specifically today we’re talking about Proposition 19. So we’re going to break the video up into a few different parts first. We’re going to talk a little bit about what Prop 19 is. Give you guys a little bit of history about Prop 19 and then go into some of the changes that have been implemented as a result of this new proposition going into effect this year. So what is Proposition 19? Proposition 19 was a California proposition that was on the most recent election ballot and it addressed two things. It addressed the amount of times that someone over 55 years old can actually transfer their tax base of their existing property into another property. And it also addressed the way that properties which are inherited from a family member are taxed and assessed. So that is what Proposition 19 is in a nutshell. And to understand how this proposition is actually going to affect landlords and homeowners here in California and San Diego specifically, we need to give you guys a little bit of history about what this bill is trying to accomplish. So to understand Proposition 19, we actually have to take you all the way back to 1978 to Proposition 13. And Proposition 13 limited the amount of property tax that could be assessed on the property to a maximum of 2% per year or tied to the inflation, whichever was less. So that was the original idea behind Proposition 13. It was kind of a landmark proposition that was really designed to help Californians create generational wealth. Fast forward a couple of years to 1986 when Proposition 58 becomes law. And Proposition 58 was an amendment to Proposition 13. And what Proposition 58 did is it created a parent child exclusion. So what that essentially means is that only the primary residence from a parent to child would now void that new tax increase when the property was passed on. And only up to $1 million for a secondary home or investment property could then be passed on to the child. So this created a very distinct line in the sand once this proposition was created so that California really wanted to make sure that this was going to people who were going to use this as a second home and limited the amount of tax benefits that they could actually hold on to for secondary homes and investment properties. So what is Prop 19 actually changed? Now that we kind of understand a little bit of the history behind it, we can now kind of take a look at some of the implications that Proposition 19 is going to have now that it is law. So what Proposition 19 is going to do, it is now going to completely eliminate the parent child exclusion for secondary homes or investment properties. So children who inherit those secondary homes or investment properties will now be taxed at the time of that transfer on the current assessed value of that property. They no longer receive that $1 million exclusion. However, it does still keep in the primary residence in place. So if the child inherited a property from their parent and plan on using it as their primary residence, they’re still able to do that under Proposition 19. However, it has completely eliminated the tax credit for secondary or investment properties. The other major change that Proposition 19 had was the ability for not only seniors people over 55 years old, but also specified disabled people and victims of natural disasters and wildfires to be able to transfer their existing tax base into a new property up to three times. Previously, the law only allowed someone to do that one time and specifically actually within their own county where they currently lived. So one of the other benefits of Proposition 19 is now, as I mentioned seniors, specified disabled people and victims of natural disasters and wildfires will be able to do this up to three times actually anywhere within the state. So that’s going to give people, those types of people a lot more flexibility to do that and keep their existing tax base to make sure that housing affordability is going to remain the same for them in the future. So that’s a little bit about Proposition 19, the history about it and some of the changes that are actually going to take place here. If you want some more information, we’re going to include the full blog here below the video. We highly encourage you to read it, comment and share. Thanks so much for watching and we’ll see you guys on the next one.