Prop 19 Explained

The election results are in. While we don’t know the full effects that our new President will have on how we invest in real estate, Prop 19 has passed in California!

I made a video about Proposition 19 and how it could be good even though it meant we needed to give up some of our rights. If you haven’t seen the video yet, go ahead and check it out here:

Prop 19 allows homeowners over the age of 55 to transfer their low property taxes to new homes up to three times. In the past, seniors were allowed to do this with Prop 60/90. However, it only lets you do this one time, and only with participating counties.

Now you can do it multiple times to anywhere in the state. And you’re not limited to only buying something at the same price or cheaper than your current property.

The essence of the proposition is to help empty nesters who wanted to move out of their big homes into something more suitable for their current needs. Instead of staying in a large 2 story home, in a good school district, they can buy an updated condo in a 55+ community; while still keeping their low property taxes with them.

This lets a new family buy the home to enroll their kids in a great school, while also increasing the funds that the school will get via the increased property taxes from the new homeowners.

And as a bonus, the surpluses that are gained from the new proposition will go towards the new California Fire Response fund. This would help fund fire suppression staffing and full-time station based personnel.

Inheritances are now taxed unless the heir moves into the home. It prevents property taxes for investment properties from being frozen in time across generations. It’s not fighting Prop 13, it’s fighting Prop 58 and 193.

How does it work?

An owner of a primary residence who is over 55 years of age, severely disabled, or a victim of a wildfire or natural disaster may transfer the taxable value of their primary residence to a replacement primary residence located anywhere in this state, that is purchased or newly constructed as that person’s principal residence within two years of the sale of the original primary residence.

If the replacement primary residence is of equal or lesser value than the original primary residence, then the taxable value of the replacement primary residence shall be the taxable value of the original primary residence.

For example. If you bought your house a long time ago and your current taxable value for your home is $400,000 and you sold it for $1,000,000. Then if your replacement property is bought for $1,000,000 or lower, the taxable value of the replacement property will stay the same at $400,000.

But if the replacement primary residence has a greater value than the original primary residence, you’ll have to pay the difference. So in our previous example, where the original primary residence’s taxable value was 400K and was sold for $1,000,000 and the replacement property was purchased for $1.1 Million, the new taxable value will be $400K + the $100K difference in property values. So you’ll be paying taxes on a $500K total taxable value.

This is fair and allows seniors to purchase properties of greater value as long as they’re willing to pay the difference in taxes. The $500K taxable value will continue to grow at 2% a year due to Prop 13.

Anyone who wants to transfer the taxable value of their primary residence needs to file an application with the assessor of the county in which the replacement primary residence is located. Your real estate agent should be able to help you with this form.

Inheriting Property

Prop 19 also changes the way inherited properties keep their taxable values. In the past, heirs could keep the taxable value of the properties they inherit. So if the property was worth $1 million and the taxable value was $400K, they could continue to pay taxes on a $400K value.

Now, the properties get reassessed unless the heir moves into the home as their primary residence. The taxable value will also increase if the property value has increased by over $1 million over the taxable value.

For example, if the property is worth $1.2 million but the taxable value is at $400k, then the heir can continue paying property taxes at the $400K valuation. But if the property is assessed at 1.6 Million, then the taxable valuation would increase by 200K; since $1.6 million is $200K more than $400K + $1 million. So the heir would pay taxes on the home at a $600K total valuation.

This $1 million buffer will increase every year starting Feb 16 2023 based on the house price index for California.

Parents are allowed to sell their homes to their children to pass on this benefit. However, grandparents need to have passed away to transfer their property taxes to their grandchildren. The heir or transferee needs to make the home their primary residence within one year to take advantage of this benefit.

It’s extremely important to pay attention to the dates. If you mess up, there’s no going back, and your property taxes will be increased forever!

The change for seniors transferring their property taxes is effective April 1, 2021. Before that date, it’s safe to assume that you’ll be working with the older Prop 60/90 regulations. The change for inherited properties is effective starting Feb 16, 2021. But consult with a real estate attorney to be safe!

Pros and Cons with the Measure:

Pro

The biggest pro is that you can now move 3 times and keep your property taxes anywhere in California. You’re also able to buy properties that are more expensive than your current home.

In the past, this prevented seniors from buying homes that were slightly more expensive than their current home and kept them from potentially moving to a place due to a county not participating in prop 90.

And the fact that they only got to do it one time also made them extremely cautious. What if their new home wasn’t as great as what they expected? What if they wanted to move again in the future? They couldn’t do it, so they just held on to their current homes until they absolutely had to move. Their one shot of moving was also used up if they married someone who did it in the past.

Cons

This obviously hurts any inheritors of California property. Unless they live in the home, inherited properties will be reassessed. Meaning the heirs will need to pay higher property taxes.

This really hurts small property owners. For example, imagine a landlord who owns a property in San Francisco. They’re super nice to their tenants and keeps their rents low. When they pass away, the heirs will now be stuck with a rent-controlled property with super low rents, but astronomical property taxes. They may be forced to sell the property below market value.

Even inherited properties, where the heirs live in the property, aren’t safe. The $1,000,000 buffer is nice and it does adjust with time. But property values in different parts of California increase faster than others; such as the Bay Area vs Fresno, but the house price index is the same for the entire state. That might mean that in the future, the $1,000,000 buffer may not be enough. The heirs who live in the property will still have to pay a substantial increase in property taxes per year.

Final comments

Some of the things in this proposition are still unclear to me at this time. What happens if you buy and sell before the April 1st date? I’m guessing that it just goes to prop 60/90. What happens if you already transferred your property taxes in the past? Do you get 2 more or does it reset and does everyone get 3 more? (section 2.1.b.3 says an owner shall not be allowed to transfer more than three times)

This was a lot to go over, and I’m sure there are things that I missed. If you have any comments or questions about the new proposition, feel free to reply back to this email.

And before you go off and try to use your new Prop 19 benefits, be sure to talk to an attorney to make sure your plan will work as you expect it to!