California passed Proposition 19, transforming tax breaks for thousands of homeowners across the state, hopefully unlocking opportunities for growth and much-needed change. The exemption is expected to help fuel home sales by encouraging those who have been reluctant to move because their property tax bills would increase sharply.
Here’s a quick summary of the major changes for people 55+, the severely disabled, and wildfire victims implemented by Prop 19:
Starting April 1, 2021 –
- Eligible homeowners can now transfer their low tax assessments anywhere within the state. Previously, under Proposition 13, eligible homeowners could transfer their tax assessments only within counties.
- Previously, tax assessments were limited to homes of equal or lesser market value, and now it applies to more expensive homes as well.
- Increases the number of times people can transfer their tax assessments from one to three.
Starting February 15, 2021–
- Require inherited properties be reassessed at market value unless they’re being used as a primary residence.
According to the CALIFORNIA ASSOCIATION OF REALTORS® President Jeanne Radsick, this is a win-win for the state. “Voters passed Proposition 19 because it is a win-win for California, providing needed housing and tax relief for seniors, wildfire victims, and generating much-needed revenue for schools, fire districts, cities, and counties as they face budget shortfalls due to harmful economic impact of COVID-19.” However, the majority of the wildfire funding isn’t projected to start flowing until roughly 2025.
Market Winners and Losers
Winners: Older homeowners ready to retire
Why: There has been a consistent push to extend the benefits of Proposition 13 in order to remove barriers and disincentives for older homeowners who are naturally ready to move onto the next phase – and home – in their lives. Coupled with the seller’s market we’re experiencing, this is a particularly great time for homeowners to sell their Southern California home for top dollar.
Retiring in Southern California is an expensive endeavor, but now it’s a much more attainable goal for longtime residents. For example, a homeowner over 55 can now sell their $800,000 single-family home and transfer their tax base to purchase a $1,000,000 condo by the beach. Empty-nesters and those wanting to move for health reasons can find new homes without facing a big tax hit.
Winners: Wildfire victims who want more
Why: Provided the same opportunities as individuals 55 or older, wildfire victims now have the freedom to quite literally rise from the ashes and enjoy greater flexibility when moving on from a devastating home loss. If a family loses their home in a wildfire, they have the opportunity to purchase an even better home without facing a large tax increase. Now, with great loss can come great new opportunities as well.
Potential winners: House hunters
Why: It’s no secret that we have a housing shortage with extremely low inventory especially within more affordable price ranges within Southern California. By allowing more homeowners to take their low tax base with them, it incentivizes them to open up desperately needed inventory for potential buyers who are currently fighting over limited homes for sale and frequently getting caught up in bidding wars.
In fact, proponents of Prop 19 believe that this change could spur 30,000 people a year to move, freeing up much-needed inventory and increasing sales by about 12% among older homeowners.
Why: Previously, individuals who inherited homes were given the same protections as older homeowners. By closing loopholes and tax breaks used on vacation houses, second homes, and beachfront rentals, estate planning is thrown into question.
Proposition 19 revises the Parent-to-Child exemptions set forth in Proposition 13, now limiting the type of transfers as well as the property tax benefit available. First of all, only a transfer of a parent’s primary residence to the child where the property remains a primary residence qualifies for the tax break. Second, the child’s assessed value is determined based on the property’s value at the time of transfer. If the property value at the time of the transfer exceeds the parent’s assessed value by less than $1 million, then the child simply takes the parent’s assessed value. However, if the property value at the time of the transfer exceeds the assessed value by $1 million or more, then the child’s assessed value is the current value of the property less $1 million. For example, if you have a primary residence with a tax base of $1.5 million, and a fair market value of $3 million, the home would be reassessed on the amount of fair market value above $2.5M ($1.5 million + $1 million).
Prop 19 helps Californians by opening up more flexible opportunities for movement so fewer individuals feel stuck in their current living situations. If you have any questions about how this measure may affect your real estate goals and plans, email us at Jim@JimSalem.com, or call (714)694-0880 for further assistance.