Here’s how Proposition 19 impacts homeowners in California.
Which Proposition 19 provisions took effect last month? When this law passed last year, I had a ton of people reach out to me asking how it applied to them, so today I’ll give you a quick update.
First, a disclaimer: I’m neither a lawyer nor a tax professional. If you have specific questions as to how this topic affects you, please contact the appropriate tax or legal professional in your area.
Now, Proposition 19 pertains to property tax bases and transferring them to your heir(s). Under the old law, if you owned your primary residence and planned on passing it onto your children, you could do so without any reassessment of the property tax basis during the transfer. That’s a significant amount of money that would be owed if the property was assessed at that time. If you bought the property a long time ago, it’s probably appreciated quite a bit since then, and property tax bases are predicated on the market value of a home when it’s sold.
Now let’s say you owned rental property (or any residential or commercial property here in California) that’s not your primary residence. Under the old law, you could pass that onto your children, but there was a $1 million property tax basis exemption per parent. If you and your spouse both owned the property, that would mean $2 million worth of exemptions. If you bought the property for $1 million, that means it would be worth $3 million when you transferred it to your children because the $2 million in exemptions would cover the difference.
Under the new law, you can pass your property onto your heir(s) without any reassessment if they live in the home as their primary residence. The other caveat to this is that there’s only a $1 million cap in terms of market value. If you bought the home for $1 million and now it’s worth $3 million, even if one of your kids makes it their primary residence, there’s still an extra million you need to reconcile. The property will be reassessed partially for that extra million, so its basis would go from around the million-dollar mark to the new fair-market value of, for example, $2 million. If your children don’t make the home their primary residence, it’s completely reassessed when you transfer it to them. That goes for any property, not just rental properties.
What does this mean in the context of our market? Property taxes are around 1% in San Diego County, and there’s a slight increase based on the area. If you’re reassessing from, say, $1 million in value to $2 million, that’s a jump from more than $10,000 a year in property taxes to over $20,000 a year.
Therefore, when a property is transferred to the owner’s heirs after they pass away, it’ll more likely be sold rather than kept so no one has to pay these increased taxes. In a coastal community like ours, people hold onto their properties for many years, which can mean a huge increase in taxes. That being said, Proposition 19 should bring new inventory to our market. As we all know, we’re experiencing an inventory shortage.
If you’d like to know more about what’s happening in our San Diego County market, don’t hesitate to reach out to me. I’d love to help you.