California Proposition 19 was approved during the elections in November of 2020 by California voters, statewide. It does two important things that you may need to know about as a real estate investor:
- This proposition changes the provisions of the parent-child and grandparent-grandchild exclusions.
- It also adds new provisions for a base year value transfer of a primary residence for anyone who is 55 years of age or older or has a severe disability. New provisions also apply to any homeowners victimized by wildfires or other natural disasters.
The rules around your property taxes may have changed with the passage of this proposition, and we want to make sure you’re prepared.
Remember that Proposition 19 actually begins with Proposition 13, which was passed in 1978. It limits your property taxes to no more than one percent of the assessed value of the property. Assessment increases cannot be any higher than two percent every year, based on a Consumer Price Index (CPI) adjustment. This new law also follows Proposition 58, which allowed for an avoidance of tax increase when property was passed from parent to child or grandparent to grandchild.
Property taxes will be reassessed during a change in ownership or when there’s new construction.
Those adjustments are excluded when the property is transferred from some parties to others or there’s an impact from a disability or a natural disaster.
Changes to the Parent-Child and Grandparent-Grandchild Exclusion
Effective in February of 2021, the changes to the parent-child and grandparent-grandchild exclusions look like this:
- The property must be the principal residence of the parent and remain the principal residence of the child. This can apply to grandparent/grandchild as well, but the parents would have to be deceased at the time a property is transferred.
- The property may not be valued at more than $1 million currently. This will be adjusted annually.
- Family homes and family farms are included.
- Other real property cannot be excluded. It’s now only applying to the principal residence and/or family farms.
- A homeowner’s exemption must be claimed, or a disabled veterans’ exemption must be claimed and filed within one year of transfer.
You’ll need to know your factored base year value (FBYV) as well as your taxable value and fair market value at the time of transfer. If you need assistance figuring out those numbers and how they are to be applied to a transfer and your taxes, reach out to us or talk with your accountant.
Homeowners 55 Years of Age or Older and Homeowners with Disabilities
When we are talking about exclusions because of age or disability, there are a few conditions that must now be met:
- This must be your principal residence
- You must be purchasing the home or paying for new construction within two years of the sale of the original home.
- You can transfer three times anywhere in the state of California.
Value again plays a major role in how these exclusions are handled. If the full cash value of the replacement home is greater than the full cash value of the original home, the difference in those values will be added to the transferred factored base year value.
Make sure you apply for a taxable value transfer with the County Assessor where your new replacement home is located.
These exclusions were effective in April of 2021.
Wildfire and Natural Disaster Victims
Also effective in April of 2021, there are some exclusions in place for anyone who was a victim of California’s wildfires. Other natural disasters may also be included.
These exclusions apply to impacted homes and homeowners anywhere in California. You’ll need to demonstrate:
- That the home is your principal residence.
- That you purchased or newly constructed your new residence within two years of selling your original home.
- That your home was impacted by a wildfire or a natural disaster that was officially declared by the governor of California.
The home must have been substantially damaged. This means that more than 50 percent of the improvement value of the residence is calculated. Any amount above the full cash value that was assessed right before the wildfire or other natural disaster will be added to the transferred value.
Why Does This Matter to California Homeowners?
Proposition 19 requires that any properties transferred to children or grandchildren get reassessed.
If you are a California homeowner, you’ll want to make sure you have prepared yourself for these new rules in a few important ways. Make sure you claim your homeowner’s exemption for your primary residence. This can decrease your tax bill every year, but more importantly, if you pass away and your child inherits your home, he or she may be able to qualify for the Primary Residence Exclusion because you claimed the exemption during your lifetime.
You’ll also have to think about how your taxes will be impacted if and when you move to a new county. Under our previous law, only specific counties in the state recognized these types of transfers. But with Proposition 19, homeowners who are over 55 years of age or have disabilities can transfer their property tax basis to any other county in the state, up to three times. If an individual is a victim of a wildlife or natural disaster, this property tax transfer is unlimited. This is new relief for a large number of homeowners in the state, so make sure you’re taking all of your tax benefits when you move or find yourself impacted by a natural disaster.
Don’t get caught off guard with new tax requirements that you did not anticipate. You can make Proposition 19 work in your favor, especially if you find yourself turning 55 soon or working around the devastation left behind by a wildfire or natural disaster.
You need to be aware of the law and its requirements, however.
We’re here to help. Please contact us at Cal-Prop Management. We work with investors in San Diego and the surrounding areas, including La Mesa, El Cajon, Encinitas, San Marcos, and Rancho Bernardo.
