Recently passed Proposition 19 in California affects homeowners in 2 key ways: (1) making it easier for owners over 55 or victims of natural disasters to relocate, and (2) restricting the exempt intra-family transfers (aka parent to child or grandparent to grandchild).
- Primary Residence Transfers
Prop. 19 allows persons over 55 and victims of a wildfire or natural disaster to make three transfers per lifetime, in any county in California, and that they may do so for a replacement property with a purchase price higher than the value of the original property. In the latter case, the assessed value for the replacement property will be the assessed value of the original property, plus the difference in value between the original property’s sales price and the purchase price of the replacement property. The Prop. 19 rules affecting these primary residence transfers will take effect on April 1, 2021. Therefore, individuals who believe they will qualify for such exemptions should wait till after April 1, 2021 to sell their current primary residence.
- Intra-Family Transfers
Under current law, the assessed value of a property may be increased no more than 2% per year, unless there is a “change in ownership,” in which case the property is reassessed at its current market value at the time of transfer. Exempt from the “change of ownership” rules are certain transfers from parents to their descendants.
With the passage of Proposition 19, however, the only transfer that will not constitute a “change in ownership” is one that meets the following criteria:
- The property transferred must be the parents’ principal residence;
- After the transfer to the child, the child must use the property as his/her primary residence; and
- The child’s assessed value will be the parents’ assessed value plus up to $1M; and any value over that amount will be subject to reassessment.
As an example, assume Mom owns her primary residence, which was purchased many years ago. At the time of her death, the residence has an assessed value of $200,000, and is worth $1.5 million. Assuming a 1.20% property tax rate, Mom pays $2,400 in property taxes on her residence each year (plus the 2% annual increases). Under current law, if Mom transfers the primary residence to her son before February 15, 2021, the transfer of the primary residence is protected in an unlimited amount. Therefore, there will be no reassessment, and her son will pay the same property taxes of $2,400. However, if her son does not intend to live in the primary residence, the assessed values for the residence will total $1.5 million, and he will pay $6,000 in property taxes each year calculated as follows: $1,500,000 value – $200,000 assessed value = $1,300,000, which is $300,000 over $1 million. Therefore, $200,000 original assessed value + $300,000 in excess of $1 million limit = $500,000 x .012 = $6,000.
Proposition 19 is effective for transfers after February 15, 2021. A child wishing to claim the exemption must do so by declaring the property to be his/her primary residence within one year of the transfer. This deadline may not be extended.