Proposition 19: How to Make a Property Tax Base Transfer

What is California Proposition 19? And What Does It Do?

Proposition 19 is a ballot measure passed by California voters in November 2020. It gave a property tax break to older homeowners and disabled persons while increasing the property taxes of those inheriting property from their parents. It also provided some tax relief for those with property loss because of wildfires and other natural disasters.

The base year value transfers provision of Proposition 19 establishes a new property tax rule with implications for the real estate market, homeowners and their heirs. We're just beginning to learn how this will play out. For those who have been hanging on to their houses longer than they would've liked, the impact on their tax bills could be a pleasant surprise.

What Are the Rules for Proposition 19?

The measure helps homeowners 55 years of age and older and those who are permanently disabled at any age. It allows older and disabled homeowners to transfer the taxable value of their home (their "primary residence") to a new home anywhere in the state. Prop 19 builds on tax relief measures brought into law in California over 40 years ago through Proposition 13.

The replacement property must be bought or built new within two years of the sale of the original property.

The transfer of the base year value has to happen on or after April 1, 2021, in order to meet Proposition 19 requirements. However, it's not required for both the original home to be sold and the replacement home to be purchased on or after April 1, 2021.

The California State Board of Equalization is charged with enforcement of Proposition 19. Their website provides valuable information and answers to frequently asked questions. Please contact them with any questions about Proposition 19.

What If the New Home is More Expensive?

The market value of the new property is not limited, but the amount above the value of the primary residence is added to the value of the new property. An application must be made to transfer the taxable value of the primary residence to the new home. This type of transfer of the taxable value of a primary residence can be done up to three times, bringing tax benefits each time.

Suppose the full cash value of the original home is less than the full cash value of the replacement home. In that case, the difference in full cash values will be added to the factored base year value of the transferred property.

Those who have lost their home because of wildfire or other natural disasters can now also transfer the taxable value of their home to a replacement residence anywhere in California. To qualify, the damage to the home must be from a wildfire or a disaster (as declared by the governor), and the damage must be substantial. "Substantial" means that over half of the improvement value of the dwelling was damaged after the fire or disaster.

How Does Proposition 19 Build On Proposition 13?

Proposition 13 was passed by California voters in 1978. Those with fixed incomes were having a hard time paying their property taxes, due to housing shortages, population growth and inflation. Because of inflation, property taxes increased rapidly, and some retired people could no longer afford to stay in homes they had resided in for years.

The problem had been that homeowners felt they could never sell their homes because their taxes would go up on their new property. With the change of ownership, the new property would be reassessed at current market value.

Proposition 13 changed all that. It assessed values of property at their 1976 value and restricted annual increases based on an assessed value not to exceed 2% per year. It also prohibited reassessment of new base year values unless there was a change of ownership or new construction. The rules of Proposition 13 applied to all real estate, residential and commercial, and regardless of individual or corporate ownership. Now older and disabled homeowners have more options and control over the process.

Proposition 13 decreased property taxes. It was passed in part due to the thought that older Californians shouldn't be pushed out of their homes because of higher taxes.

Proposition 13 has been enormously popular, and it set a principle and a precedent that has been carried out by Proposition 19.

What About Propositions 60 and 90?

Proposition 60 said that people ages 55 or over could transfer the base year value of their principal residence to a replacement home of equal or lesser value, as long as it's purchased or newly constructed within two years of the sale of the original residence.

Proposition 60 allowed for the transfer of base year values within the same county of California, whereas Proposition 90 allowed transfers of base year values from one California county to another, as long as the county had authorized the transfer.

This meant that senior citizens could move without their property taxes increasing.

Both properties had to be the owner's primary residence, and these were just one-time tax benefits.

Who Does Proposition 19 Help?

Proposition 19 helps those ages 55 years or over, disabled individuals and those who had property damaged by wildfires or other natural disasters. Older and disabled Californians can now pay lower property taxes if they move to a new and more expensive property.

Homeowners looking to downsize or want to move for health reasons have more options because of Proposition 19. After working hard to maintain their homes and build equity over the years, it is good that older and disabled homeowners have this consideration.

The measure is also good for the real estate industry and for investors who would like to find new properties. More homes will become available, many for the first time in decades.

Who Does Proposition 19 Hurt?

Property taxes will go up for children who inherit the parents' home but don't intend to use it as their primary residence. If they had planned to keep their parents' residence as a second home or use it as a rental, under Proposition 19, their taxes went up a lot.

Over the past ten years, around 650,000 California homeowners had received tax breaks when they inherited their parents' former residences. A lot of homes inherited along the coast were used as investment properties.

This became known as "The Lebowski Loophole" after Jeff Bridges (famous as The Dude from the film The Big Lebowski) and siblings rented out their parents' Malibu beachfront home for $16,000 a month, despite the annual taxes being a fraction of that amount. (This is also known more prosaically as the parent/child exclusion.)

Proposition 19 eliminates this tax break for investment homes and commercial properties. Those who inherit property from their parents now need to pay the taxes based on the market value. This generates more than enough revenue to make up for the tax relief offered to older homeowners.

If children move into homes left to them by their parents they can retain the tax break (with some limitations).

How Does Proposition 19 Affect California Real Estate?

Proponents of Proposition 19 hoped it would help stimulate the housing market by encouraging people 55 and up to buy real estate.

Both buying and selling have been stimulated, and a wider variety of homes are now available on the marketplace. Some seniors were hesitant to sell their primary residence and downsize. Now homes held onto for years will be coming onto the market. It also gives those senior citizens the incentive to buy a new residence within the state rather than looking outside of California.

Children inheriting real estate from their parents may feel less inclined to keep those properties as second residences or rental property. So those properties could also bring more properties to market.

How Do You Transfer Your Property Tax Base?

Propositions 13 and 60 enabled those over 55 years and people with disabilities to transfer the taxable value of their existing residence to a new home, as long as the new home's market value was equal to or less than the existing residence's market value. It also had to be in Los Angeles County or one of nine participating counties in California.

Proposition 19 took effect on April 1, 2021, and it modified the previous provisions, allowing eligible homeowners to transfer the taxable value of their existing primary home to a new home. The new home can be of any value and can be located anywhere in California. In addition, the exclusion can be filed up to three times by a property owner over the course of their lifetime.

Your county assessor's office should be able to help with any questions about base year value transfers.

Conclusion

Proposition 19 is part of a history of actions by California voters to protect the ability of older and disabled homeowners from excessive tax burdens. This will keep people from leaving California and help give everyone more options for homeownership and investment.