California Property Taxes - Have You Factored In Prop 19?
What Is Prop 19?
In California, property taxes aren’t as straightforward. There are more variables to consider, such as your established tax rate and the home’s assessed value.
The Golden State has recently passed numerous laws that mandate property tax rules. The most recent was Proposition 19, a statewide ballot measure that became effective on February 16th, 2021.
Prop. 19 eliminates the exclusion that allowed children to inherit their parents’ home at those parent’s tax assessment, making it harder for high-net-worth families with a crown jewel asset – their home – who want to leave this prized possession as an inheritance on top of all the other reasons why Prop. 19 will have major impacts in California real estate markets and beyond.
Why Is California Unusual? A Brief History
California property taxes are capped. This means that your property tax calculation is not based on the assessed value but rather on a number set over time by government regulations, which may be much lower than the market price today, even if you just purchased it or received it as a gift.
Property taxes typically are based on assessed value rather than current fair market value. In most states, tax assessments are conducted every five years and changed when a property sold transferred as a gift; however, in California, laws passed artificially limit tax assessment over time.
In 1978, California voters passed a constitutional amendment known as the “People’s Initiative to Limit Property Taxation.” Voters meant prop 13 to protect older residents who were unable to keep up with significant property tax increases and out-of-control housing prices in California at that time.
If you plan to transfer your residence to your children or as part of an inheritance, then seek professional advice first. The new property tax rules could impact the outcome and end up costing more than anticipated.
In 1986, voters approved Prop. 58, which allowed inheritors to keep the tax assessed value of their deceased parents or grandparents at current market rates after being gifted a property. This meant that children could be gifted homes by their parents and pay taxes on them as if they were bought at today’s prices while keeping the benefits of old lower-than-market price assessments from when the original owner originally purchased it.
Parents could transfer up to $1 million per spouse or a total of $2 million in assessed value on additional properties without affecting the tax assessment. In addition, inheritors were not required to live in their inherited homes, and they could keep it as an investment property.
Prop. 19 is a proposition that will impact homeowners who inherit property, but it won’t affect all of them in the same way. Inheritors with homes or other properties worth less than 1 million dollars can elect to retain their inherited value and exclude any future assessed values from being taxed as well. However, heirs whose inheritance exceeds this amount will be required to pay taxes for both current and excluded amounts – which could lead some people to lose out on tax benefits they’ve been relying upon.
Who Benefits From Prop 19?
Prop. 19 may not protect high-net-worth families who inherit property, but it does expand tax benefits for those 55 and older by broadening the state’s low-income housing credit program.
Prop. 60 was passed in 1986 and allowed homeowners over age 55 who wanted to sell their home and move to another house of equal or lesser value in the same county without worrying about a huge jump in taxes that might be difficult for them to pay.
Prop. 19 expands this benefit further.
The new rules allow people to move freely between different counties in the state. They can even purchase a larger and more expensive house than their previous one, and seniors over 55 years old can transfer up to three of their tax assessments instead of just 1.
Prop. 19’s rules for homeowners 55 and older also apply to people with severe disabilities and those who lost their homes due to a natural disaster or catastrophe, such as a wildfire or earthquake.
Prop. 19 allows homeowners to move residences within the state without incurring higher property taxes, making it especially attractive for eligible residents who want to sell their existing primary residence and buy another one in California.
If you own a primary or secondary property that you intend to transfer to your children as an inheritance, it is crucial to speak with a financial advisor and estate planning attorney about strategies designed to mitigate the limitations of the new law.