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John Wei, CFP®, CPWA®
If the new California Proposition 19 passes during November 2020, it could spell property tax implications for Bay Area residents thinking of making a move, and even more so for those inheriting property.
There are several key propositions already in place that afford Bay Area homeowners opportunities to retain or transfer a low property tax basis, making it more affordable and even lucrative to remain in California for the long term. For those wishing to remain in California, but perhaps considering a move to a smaller home, Propositions 60 & 90 (passed in 1986 and 1988, respectively) are important constitutional tax initiatives to understand. If an inherited property may be in your future, or you’re working through your estate planning, Proposition 19 as well as the existing Proposition 13 (1988) are ones to brush up on.
California Proposition 19 is positioned as a “tax relief” as it broadens the accessibility and benefits of previous propositions 13, 58, 60 & 90 to “seniors, wildfire victims, and people with disabilities.”
Under the existing Proposition 13, property taxation for homes that have not sold or undergone new construction is based on the property value as of the later of 1975 or the purchase date, with annual increases limited to an inflation rate not to exceed two percent of California CPI, whichever is less.
Currently, eligible California homeowners can transfer their tax assessments to a different home of the same or lesser market value if the new home is located within certain counties. This allows seniors 55 and over to downsize, and/or move closer to family members without suffering a property tax hike.
Proposition 19 allows transfers anywhere in the state and allows the new property to be of greater value. The Caveat: these higher-valued homes will have an upward adjustment to the property tax basis. For example, if a senior couple were to sell their home with an assessed value of $450,000 for $3,000,000, and acquire another home for $4,000,000, the new home’s assessed value would be $1,450,000 ($450,000 plus the increase of $1,000,000 in home value).
To understand the implications of a yes vote on 19, let’s first review the propositions already in place.
In California, based on Proposition 58 (an addition to Prop 13 passed by voters in 1986), parents or grandparents can transfer primary residential properties to their children or grandchildren, of an unlimited amount, without the property’s tax assessment resetting to market value. Homes or business properties that are not considered primary residence can also be transferred from parent/grandparent to child/grandchild with the first $1,000,000 exempt from re-assessment when transferred.
For example, if Joe inherits a home from his parents with an assessed value of $700,000, under Proposition 58, Joe also inherits the low property tax bill of about $8,000 per year, even if the house has a fair market value far greater than the assessed value.
Proposition 19 would eliminate the exemption if the child does not live in the transferred property as his primary residence within the first year of inheriting the property. In this case, if Joe inherited the family home and simply cannot make the home his primary residence, perhaps sharing the inheritance with siblings, the $8,000 annual bill on a property with a current market value of $2,500,000 million will become roughly $28,000.
However, the proposition also would trigger an upward tax assessment for owner-occupied inherited properties after February 16, 2023, for properties with a market value more than $1,000,000 greater than taxable value.
Proposition 19 was proposed in some part to address issues with the thousands of people who’ve lost their homes in the wildfires this year and to bring in more tax revenue to fund schools that lack funding.
Here’s what could change (or not change) with Proposition 19:
|Yes on Proposition 19||No on Proposition 19|
|Will allow eligible homeowners to transfer their tax assessments anywhere within the state and allow tax assessments to be transferred to a more expensive home with an upward adjustment||Based on existing Proposition 60 & 90, eligible homeowners can transfer their tax assessments within certain counties and to homes of equal or lesser market value|
|Increases the number of times that persons over 55 years old or with severe disabilities can transfer their tax assessments from one to three (disaster victims are allowed one transfer)||Keeps the number of times that persons over 55 years old or with severe disabilities can transfer their tax assessments at one|
|Requires that inherited homes that are not used as principal residences, such as vacation homes, businesses, or rentals, be reassessed at market value when transferred||Allows inherited homes not used as principal residences, such as vacation homes, businesses, and rentals to be transferred from parent to child or grandparent to grandchild without impact for those properties with a market value assessment under $1,000,000|
|Allocates additional revenue or net savings resulting from the ballot measure to wildfire agencies and counties.|
Planning a move is a big decision. In fact, there are no small decisions when it comes to real estate in the Bay Area. Your personal circumstances must be carefully considered. Having an advisor who can walk through the scenarios and tax implications, among other financial considerations, can provide clarity and peace of mind.
If you’re still unsure about how Proposition 19 or the others referenced could affect your plans, consult with your Summitry Financial Advisor. If you aren’t yet a Summitry client, contact us today.
Interested in more election-based perspectives? Read “How the Election Affects the Stock Market?” and our key takeaways from a recent Election 2020 Outlook webinar featuring Dan Clifton, Strategas Partners.
All material of opinion reflects the judgment of Adviser at this time and are subject to change. This material is not intended as an offer or solicitation to buy, hold, or sell any financial instrument or investment advisory services.
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