In November California passed Proposition 19, a constitutional amendment that implements the most significant changes to property tax transfer rules in over 20 years. Prop 19 liberalizes rules that allow property owners over age 55 to maintain their property tax base when selling and moving within California, and restricts the ability to transfer property to children or grandchildren with carryover property tax.
To understand the significance of these changes, the assessed value of a property is its initial purchase price, which can be increased by no more than 2% a year. Since California real estate has generally appreciated at more than 2% annually over the decades, the current value of a property may be much higher than its assessed value, so unless a transfer is exempted a new owner’s property tax bill could increase significantly for property held a long time. The old law exempted many family transfers and certain over-55 sales from costly reassessment.
Under old rules, California homeowners over 55 who wanted to move and maintain their low property tax base were limited to a replacement property of equal or lesser value. They could use this strategy only once, and only between counties that participated in this voluntary system. After April 1, 2021 you can swap residences up to three times in your lifetime and move anywhere within California. A major enhancement is that any house value is acceptable, although if you “up-size” you will pay an incremental property tax on the amount your new home cost exceeds your old home’s sales price. In addition, those disabled, or victims of a wildfire or natural disaster can now also qualify more easily.
Under old rules, a parent or qualifying grandparent could leave their primary residence of any value plus additional property of up to $1 million historical assessed value and preserve the old property tax. After February 15, 2021, carryover tax on the primary residence is allowed only if the home becomes the child’s principal residence, and the transferred tax base is limited to $1.0 million current value – values over $1.0 million are fully assessed. For all other property, the ability to pass on your property tax base to the next generation is completely eliminated; property transfers are fully reassessed at market value.
Those considering the transfer of property should be mindful of many other estate & tax planning elements, including gifting rules, capital gains, cost basis step up and related depreciation. The rules for primary residence transfers are effective for transfers after February 15, 2021, so with holiday and Covid-19 delays you should look into this without delay. Under the right circumstances, such transfers now may make sense but please consult a tax attorney or other expert on this topic. One resource our office has relied on is local Pasadena Attorney and CPA Steve Sorell, who is a specialist in this field. According to Steve, “This area of the law may seem straightforward but there are many unique variables to each family situation as well as numerous limitations and exceptions in the law. We highly recommend each potential transaction be examined carefully.” Should you need more information on this topic please let us know if we can assist in any way.