- Scope – What is the purpose/ subject of this memo
The purpose of this memo is to discuss California Proposition 19, which is also referred to as The Home Protection for Seniors, Severely Disabled, Families, and Victims of Wildfire or Natural Disasters Act. This measure was approved by California voters in November 2020. This memo will provide an explanation of the new Proposition and compare it to the existing law. Additionally, the memo contains a list of topics to consider as a result of the passage of this new law.
- Analysis – Existing Law (ARTICLE XIII A of the California Constitution)
The existing law is under Proposition 13 which was passed in 1978. Under this law, the following was true:
- Property tax is limited to 1% of a home’s taxable value, based on when the home was purchased, and thereafter, the appraised value of the property when purchased, newly constructed, or a change in ownership occurs, subject to an annual inflation adjustment not to exceed 2%.
- For taxpayers 55 years or older or any severely and permanently disabled person residing in the property eligible for the homeowner’s exemption, they can transfer the base year value of that property to a replacement dwelling of equal or lesser value located in the same county, or another county that has adopted an ordinance allowing base years value transfers from other counties, as provided. Eligible taxpayers were able to utilize this one time.
- The purchase or transfer of the principal residence, and the first $1,000,000 of other real property, of a transferor in the case of a transfer between parents and their children, or between grandparents and their grandchildren if all the parents of those grandchildren are deceased, is not a “purchase” or “change in ownership” for purposes of determining the “full cash value” of the property for taxation. Additionally, there is a restriction on how much that taxable value can go up each year, even if a home’s market value increases much more.
- Analysis – New Tax Law (Assembly Constitutional Amendment No. 11)
Proposition 19 changes the existing law in the following ways:
- Homeowners who are 55 or older or who have lost a home in a natural disaster can now transfer their tax assessment from their previous home to a new more expensive home. This can be done up to three times, instead of the previous one-time allowance.
- The measure eliminates the exclusion for reassessment when a house transfers to a child or a grandchild. The child or grandchild must actually use the residence as their primary residence to avoid reassessment. Previously, there was no requirement for the inheritor to utilize the house as their primary residence.
- Topics to Consider
- Who does this help and how?
CA proposition 19 benefits homeowners who are 55 years old or older. When they move to a new and more expensive residence, they can blend the taxable value of their old house with the purchase price of a new, more expensive home, reducing the property tax payment they would otherwise face. This benefit would also extend to disabled taxpayers and taxpayers who have lost their homes in wildfires or other natural disasters.
“For example, a qualifying homeowner who owns a home with a taxable value of $200,000 that is worth $600,000 on the market would pay roughly $2,200 in property taxes now. If the homeowner moves to a $700,000 house, the homeowner will pay $3,300 a year in property taxes under Proposition 19. Without the initiative, the same homeowner would pay $7,700 annually at the new home.” (LA Times)
Based on the example provided by the LA Times, a qualifying homeowner who owns a home with a taxable value of $200,000 that is worth $600,000 on the market would pay roughly $2,200 in property taxes now. If they move to a $400,000 house, it would be expected that if the new home is less than the $600,000 market value of the old home, then the property taxes would be unchanged.
- Who does this hurt?
The group of people who would be hurt by proposition 19 are the children who will inherit the properties from their families and intend to rent it out or keep it as a second home. If the child or grandchild that inherited the property does not utilize the property as their primary residence, the property tax will be reassessed based on the market value and thus the children or grandchildren would lose the ability to retain the tax basis that was based on the original purchase price.
- Are there any exceptions?
As we discussed above, for the children who will inherit the properties from their families and intend to rent it out or keep it as a second home, the properties will be reassessed, and the tax base would go up based on the market value consequently. However, Prop 19 does not change any of the ownership rules for properties owned by legal entities, which generally provide that legal entity interests can be transferred from current owners to new owners without triggering a reassessment, subject only to the change in control rule and cumulative ownership rules. This legal entity rule is sometimes referred to as “The Dell Maneuver” because Michael Dell purchased the Fairmont Miramar Hotel in Santa Monica without triggering a reassessment. It should be noted that there are regular attempts to close off the Dell Maneuver legislatively, but none have succeeded to date. Accordingly, individual owners would therefore have an incentive to transfer their property to a legal entity to avoid future reassessment.
- Important Date
The deadline to transfer real properties without triggering the new reassessment rules under Prop 19 is February 15, 2021.
Generally, your estate attorney or attorney will be able to advise you in these matters. We recommend you speak with your legal counsel if you desire to implement any changes related to Prop 19.