All PSAR members should be aware of the significant benefits available to homeowners as a result of the recent passage of Proposition 19 in the November general election.
Approved by California voters by a 51.1 percent to 48.9 percent margin, Prop. 19 is considered by many as a landmark property tax exemption law that is now part of the California constitution. Thanks to more than 8.5 million voters who marked their ballots “yes” for Prop. 19, homeowners will be able to take advantage of tax relief while providing much-needed revenue for schools, fire districts, cities and counties as they face budget shortfalls due to the harmful economic impact of Covid-19.
Prop. 19 was endorsed by C.A.R. and many others because it will spur housing economic recovery.
Prop. 19 limits property tax increases on primary residences for family transfers, homeowners over 55 years old, people with severe disabilities and victims of natural disasters or wildfires by removing unfair location and price restrictions.
Prop. 19 also limits property tax increases on family homes used as a primary residence by protecting the right of parents and grandparents to pass on their family home to their children and grandchildren for continued use as a primary residence.
Overall, Prop. 19 will open up tens of thousands of housing opportunities, making homes more readily available for first-time homeowners, families and Californians throughout the state.
There are two major benefits of Prop. 19, both dealing with what’s called “tax basis portability,” which means homeowners can enjoy an exemption from a reassessment of property taxes when they move to a new residence.
New Rules for Homeowners Over 55 Years of Age
With the passage of Prop. 19, a homeowner who is over 55 years of age, severely disabled or whose home has been substantially damaged by wildfire or natural disaster may transfer the taxable value of their primary residence to a replacement primary residence anywhere in the state within two years of the sale and up to three times, regardless of the value of the replacement primary residence.
According to the California Association of REALTORS® (C.A.R.), Prop.19 makes three significant changes to the portability of one’s tax basis from the sale of a principal residence to a replacement principal residence.
First, Prop. 19 allows a seller of a principal residence to transfer the tax basis of that principal residence to the purchase of a replacement principal residence anywhere in the State of California. Under prior law, the seller was limited to transfers either within the same county (under Proposition 60) or between a limited number of counties that specifically permitted such taxable value transfers (under Proposition 90).
Second, Prop. 19 allows the transfer of the tax basis of the sold principal residence to the replacement principal residence regardless of value with certain adjustments to the tax basis if the replacement principal property is of “greater value” than the sold principal residence. Under prior law, only transfers of “equal or lesser value” were eligible for the exemption.
Third, Prop.19 permits such transfers up to three times (but unlimited for those whose homes were destroyed or substantially damaged by fire). Prior law allowed such transfers only one time
There still remains some questions about the timing of tax benefits under Prop. 19 applying to transactions and sales before April 1, 2021.
According a statement from C.A.R., “Although we believe that the tax benefits under Proposition 19 apply to transactions where either the sale or purchase of a primary residence takes place before April 1, 2021, as long as the subsequent sale or purchase takes place within two years and on or after April 1, 2021, others have taken the position that both the sale and purchase must occur on or after April 1, 2021. C.A.R. will seek official clarification of this issue.”
New Rules on Intergenerational Family Transfers After Feb. 1, 2020
Prop. 19 also changes the rules on exemptions from reassessment for intergenerational transfers by limiting the exemption to the transfer of a primary residence to a child (or grandchild) only when the property continues to be used as a family home by the child (or grandchild). However, if the divergence between the taxable value and the actual value is too great, a partial increase in the new taxable value will be imposed.
Prop. 19 also includes provisions that would allow the transfer of a family farm to retain its taxable value.
These new rules apply to any purchase or transfer beginning Feb. 16, 2021.
Here are a few questions-and-answers relating to intergenerational family transfers and family farms:
Q: If I pass my principal residence on to my children or grandchildren, will the property be reassessed?
A: So long as the property continues to be used as a family home (primary residence), and the transferee claims the homeowner exemption, the property tax basis will remain the same, subject to some upward adjustments if the property value, at the time of transfer, is more than $1M over the original tax basis.
Q: If the property is transferred to a child or grandchild and used as a family home, what will the new tax basis be if at the time of transfer the property value is less than $1M over the original tax basis?
A: The new tax basis will remain the same as the original tax basis. For example, if the original tax basis was, let's say, $500,000, and at the time of transfer the property is valued at $1.2 M, then the tax basis will remain at $500,000. This is because $1.2M is not more than $1M over the original taxable basis.
Q: How are family farms included in Proposition 19?
A: Family farms have the same exemptions as family homes (principal residences). “Family Farm” means any real property under cultivation or which is being used for pasture, or grazing, or that is used to produce any agricultural commodity. It does not require the transferee to live in the property as a principal residence.
PSAR members who have additional questions about the benefits of Prop. 19 are encouraged to contact either C.A.R. or the office of San Diego County Assessor-Recorder-County Clerk (ARCC) Ernest J. Dronenburg, Jr. The ARCC office oversees assessing the value of real estate and personal property (property taxes constitute the largest share of revenue for the county). The office also involves registering business names and issuing marriage licenses, birth and death certificates.
For assistance from the Assessor’s office please contact Taxpayer Advocate Jordan Marks. Jordan is a PSAR member and welcomes calls and emails from PSAR members. He can be reached at Jordan.Marks@sdcounty.ca.gov. For emergency assistance you can reach Jordan on his cell phone is (619) 372-0226.The website for the ARCC office is www.SDARCC.com.