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Proposition 19 and What it Means for California Homeowners: The Good and Bad News

The Good News
  • Homeowners aged over 55 (or those with disabilities or affected by the wildfires/natural disasters) will be able to transfer their original Property Tax assessed value to a newly purchased property anywhere in California - previously the ability to transfer assessed values was restricted to a limited number of counties with reciprocal arrangements.

  • This new relief is effective April 1, 2021. Sellers can move up to 3 times in their lifetimes and still carry their original assessed value to a new property.

  • If the new property’s purchase price is less than the sale price of the original property, then no increase in assessed value will be made.

  • Where the new property’s purchase price is greater than the selling price of the original property – the homeowner may still qualify for partial relief with only the excess of the purchase price over the selling price being subject to an increased assessment.

The Bad News
  • Under the existing rules, parents can transfer ownership of their principal residence to their kids or grandkids (by lifetime gift or at their passing) without triggering a property tax reassessment in almost all circumstances.

  • Under Prop 19, transfers to kids/grandkids made after February 15, 2021 will be subject to reassessment unless the heirs use the home as their principal residence immediately after the transfer and claim an exemption from reassessment within 1 year of the transfer.

  • If the home is not used by a child/grandchild as a principal residence immediately after the transfer, (i.e. it is rented or used only as a vacation home), then the reassessment will be on the full market value of the home at the time of the transfer.

  • Even where a child/grandchild does occupy the home and claims an exemption from reassessment, the relief from reassessment on post-February 15, 2021 transfers will be subject to a limit.

  • That limit is calculated as the original assessed value (i.e. the assessed value applicable to the parents) plus $1M. If the new assessed value exceeds this limit, then the excess is subject to tax in the usual way and added to the original assessment.

Takeaway

Homeowners who wish to transfer their home, and their original property tax assessed value (!), to their kids’/grandkids will need to ensure that the home is to be used as a principal residence by one of the heirs if the transfer takes place after February 15, 2021. Even where this is the case, relief from reassessment may be limited to the original assessed value plus $1M.

Planning Point
  • Transfers that take place before February 16, 2021 will not be subject to the principal residence requirement or the limit on relief - the transfer will be governed by the law existing prior to the introduction of Proposition 19.

If you are considering a lifetime transfer to your kids/grandkids prior to February 16, 2021 in order to take advantage of the “old” property tax assessment rules, bear in mind that a lifetime transfer will mean that your kids/grandkids will forgo the “step-up in tax basis” for capital gains tax purposes that would apply had they inherited the property at your passing.

As you go through your transitions, know that BakerAvenue is here for you and your family. Contact us for additional property tax questions you may have.

Source: CA.gov

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Baker Avenue Asset Management LP. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. All information is believed to be factual and up-to-date as of this writing and is subject to change. Before purchasing any investment, a prospective investor should consult with its own investment, accounting, legal and tax advisers to evaluate independently the risks, consequences and suitability of any investment.

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