What is Proposition 19?

James Kil November 25, 2020

Proposition 19 (takes effect 2/15/2021) recently passed and has supplanted Proposition 13, so what does that mean? Let's briefly review Proposition 13 to see what's changing.

In a nutshell: Proposition 13 allowed children who inherited real property from their parents to keep the same low tax basis that their parent's benefitted from.

Since the assessed value of real property was capped at 2% annually, the tax benefits equate to a large sum of money since the fair market value of real estate in California has FAR exceeded the annual adjustment cap of 2% via Proposition 13 in 1978.

Once Proposition 19 takes effect, children who inherit property from their parents must move in to the inherited property and make it their primary residence in order to keep the low tax basis enjoyed by their parents, AND only $1mm of the re assessed value will be exempt from the new property tax basis.

Without being too long winded, here are the main pros and cons of both Proposition 13 and Proposition 19.

Proposition 13

Pros:

Capped the sales tax at 1% of the sale price of the home.
Limited future property tax values at a maximum of 2% a year. (including commercial properties – see Proposition 15)
Allow the lower property tax basis on inherited homes to be transferred without requiring that the new owner live in the property as a primary residence.
Keeps neighborhoods stabilized so that people are not driven out by tax increases that become unaffordable.

Cons:

If a seniors (55+) or disabled person wants to sell their property or move, they can only transfer their lower property tax basis to a new home IF:
The new home is worth less than your previous one
Is within the same county or available select counties
Can only take advantage of this tax transfer once in their lifetime
Would not have the ability to benefit from the potential pros of Proposition 19

Proposition 19

Pros:

If a seniors (55+), disabled person, or victims of wildfire wants to sell their current residence or move, they can now transfer their lower property tax basis to a new home with the following flexibilities:
- They can now transfer their lower property tax basis to a home that is worth more than their previous home and would pay additional taxes on the difference of the two values.
- They can now transfer their lower tax basis to a new home anywhere in the State of California.
- They can now take advantage of this tax transfer up to 3 times in their lifetime.
  - Example: If a person mentioned above has a home that has a taxable value of $1mm and sells it for $3mm, and they buy a new home in California for $3mm or less, they can transfer the $1mm taxable value to the new home.
If the same person in the Example decides to buy a more expensive home for $4mm, than their new properties taxable value would be $2mm ($1mm original taxable value + ($4mm - $3mm)).

Cons:

The lower tax basis can still be inherited, but the caveat is that the heir/successor can only take advantage of the lower property tax basis if they move into or already live in the home as a primary residence (This does not affect farms) (The inherited property tax value is limited to a $1mm exclusion).
- Example: If a home has a taxable value of $3mm, but it is now worth $4mm, the difference being a $1mm reassessed value. When the property is gifted, the taxable value of the property will be $3mm (($3mm - $1mm exclusion) + $1mm reassessed value)
The additional cost basis incurred by home owners that are renting out their investment properties may pass that thru to their tenants by increasing rents, but of course, there are stipulations to rent increases that must be adhered to.

FAQ:

How long does the child have to move in to the property?

They must move in as soon as possible, and they have 1 year to file the "Parent Child Exclusion Form" & "Homeowner Exemption Form".

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