Last year, California voters passed Proposition 19. Proponents of this law hope that it will stimulate the housing market by encouraging more people, especially Seniors (55+), to buy real estate. Overall, Proposition 19 will change how property is assessed for tax purposes in two different situations:
When parents transfer property to children/ when grandparents transfer property to grandchildren. (Effective February 16, 2021).
When Select People (Seniors 55+, Severely Disabled People, & Victims of Natural Disasters) sell and buy new primary homes. (Effective April 1, 2021).
How Property Value is Assessed in California
California assesses the value of a real property by looking to its purchase price. For example, if Arnold buys a home for $500K in 1985, his property will be valued at $500k for tax purposes. Thereafter, each year his property would be assessed by taking inflation into account, which is usually set at a small percentage increase (e.g., 1-2%). So, in 1985, his property’s value would be assessed at $500K but, in 1986, the value would be close to between $505K and $510K.
PARENT-TO-CHILD & GRANDPARENT-TO-GRANDCHILD TRANSFER OF PROPERTY
Under current law, parents and grandparents are able to transfer their primary residence to their issue (i.e., children or grandchildren) without the residence being assessed at market value for tax purposes. Rather, the property’s value would be assessed at the value it had during the time of its purchase (plus any additional increases the government attaches for inflation). The transferred residence, moreover, would not have to become the issue’s primary residence.
Additionally, other properties which are not primary residences, are also able to be transferred without them being assessed at market value, but only up $1 million in value cumulatively. Any property valued over $1 million would be assessed at market rate.
Once Proposition 19 comes into effect, parents and grandparents will still be able to transfer their primary residence to their issue, but under new conditions. First, the issue must accept the residence as his or her primary residence unless the property will automatically be assessed at market value. Secondly, the residence’s value will be assessed at its value during the time of its purchase (plus any additional increases the government attaches for inflation) up until the property’s value exceeds $1 million. If the value of the property exceeds $1 million, the issue will pay taxes either at a fair market rate for every dollar exceeding $1 million, or the original purchase price —whichever is higher. For example, say Arnold bought his primary residence in 1975 for $500k; and in 2022, the property’s market value is $1.7 million. When he transfers the property to his daughter, Beth, the property’s value will be assessed at $700K for tax purposes. But say the property was instead worth $1.2 million when Arnold transferred the property to Beth, the property’s value would be assessed at $500K. Why wouldn’t it be assessed at $200K? Because the original purchase price ($500K) is worth more than the value in excess of $1 million dollars ($200K). In the prior example, the original purchase price ($500K) was not worth more than the value in excess of $1 million ($700K). Thirdly, properties in addition to the parent’s or grandparent’s primary residence no longer receive any tax breaks when transferred but instead are automatically assessed at their market value.
PURCHASING OF A NEW PRIMARY RESIDENCE
Under current law, Seniors (55+) and severely disabled people, can purchase a new primary residence, and the value of the new property—for tax purposes—would be assessed according to the purchase price of their former property unless the new property’s market value exceeds the current market value of the original home.
Once Proposition 19 comes into effect, not only will Seniors (55+) and severely disabled people be able to benefit from a tax break but so will survivors of natural disasters (such as forest fires). Under the new law, if the market value of a newly purchased primary residence exceeds $1 million dollars, then the value of the new property—for tax purposes—would be the sum of the purchaser’s original property-market value and the purchase price of the new property in excess of $1 million. For example, if Arnold buys his old property in 1982 for $600K, sales it in 2023 for $1 million, and then buys his new residence for $1.6 million, the value of his property for tax purposes would be $1.2 million (i.e., the original residency’s value of $600k + the difference between the sale price of the old home and the purchase price of the new home which is $600k). If the new property’s purchase price is under $1 million, the purchaser will only be taxed on the value of his or her original property (plus any additional increases the government attaches for inflation). It is worth noting, that the tax break in proposition 19 can be used three times.