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What California’s Proposition 19 Means for Property Owners

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By Komal Kabra

New California law Proposition 19 will significantly change how certain real estate is taxed in the state. The proposition will benefit seniors and certain select California homeowners, while children who expect to inherit real estate may lose out on major tax savings.

Tax benefits for certain california homeowners

Proposition 19 delivers property tax savings to certain eligible California homeowners, including people who:

  • Are 55+ years old.
  • Have severe disabilities.
  • Have lost a home in a natural disaster.

The regulation replaces 1978 law, Proposition 13, which levies property taxes based on a home’s original purchase price, even as the home’s value appreciates over time. Additionally, the law caps property tax at 1% of the sale price, with a maximum 2% increase per year.

Proposition 19 preserves these benefits, while also allowing eligible California homeowners to transfer their lower “base year” property tax rate to a new home of any value, anywhere in the state, up to three times. This provision of the law is effective for homes purchased on or after April 1, 2021.

Proposition

Number of Times the Tax Rate Can be Transferred to a New Home

Value of the New Home Compared to the Old One

Location of the New Home

Proposition 13

(1978)

Once

Equal or lesser value

Within the same county, or between a few select counties.

 

Proposition 19

(2021)

Three times

Any value

Anywhere in California

 

If an eligible homeowner purchases a home of a greater value than their previous home under Proposition 19, they will pay a blended tax rate. For example:

  • A couple in their 60s owns a home worth $600,000 in Los Angeles, which they purchased in 1972 for $200,000.
  • They sell the Los Angeles home, and purchase a new home for $700,000 in San Diego.
  • The first $600,000 of the new San Diego home will be taxed based on their original 1972 purchase price of $200,000.
  • The next $100,000 will be taxed based on current market value.

chANGES TO INHERITANCE PROPERTY TAXES

While some California homeowners will benefit from Proposition 19, the new law eliminates tax benefits for many children who expect to inherit property in California.

Prior to Proposition 19, parents could transfer any property to children without taxes being reassessed based on the home’s current market value. Regardless of how children used the home, they would pay property tax on the home’s original purchase price, just like their parents did. Additionally, any secondary property, such as a vacation home, rental property, or commercial property, could be transferred to children without an increase in property taxes.

For property inherited on or after February 16, 2021, children can retain their parents’ reduced property tax only if the inherited property was the parents’ primary residence or family farm, and the child will use it for the same purpose. If multiple children are inheriting the home, they must all move into the home as their primary residence to retain property tax savings.

If an individual chooses to keep the inherited property and use it as their primary residence, then up to $1 million of the home’s current market value will be taxed based on the original purchase price. Anything above $1 million in value will be taxed based on current fair market value.

Children can still save money in taxes if they sell their inherited home thanks to federal step-up in basis tax law. The step-up in basis allows children who inherit property upon their parent’s death to sell the property and avoid paying capital gains tax on its appreciated value. For example, a child inherits a property upon their parent’s death that was purchased for $100,000. The child sells the property for $300,000. Under federal law, the child does not have to pay capital gains taxes on the home’s $200,000 appreciation.

Conclusion

Proposition 19 will make it easier for certain California homeowners to purchase a new home, while it eliminates tax savings for certain inheritors. For help maximizing your tax savings, please contact your trusted Chugh CPAs, LLP professional.