Transferring Property Tax Base Under Prop 19 - What To Know.
If part of your retirement planning involves transferring (inheritance or sale) your California residence to your children or grandchildren, or selling your home and relocating to another California residence, the rules of Proposition 19 may be useful information to you. See Prop 19 Fact Sheet - California Board of Equalization
California’s Proposition 19, which took effect in 2021, significantly alters state property taxes. It is not a replacement for Proposition 13, which has provisions that still apply, but Proposition 19 did make a couple of major changes. It allows eligible homeowners (age 55+, disabled, or wildfire victims) to transfer their lower property tax base up to 3 times anywhere within the state. However, it limits parent-to-child inheritance tax breaks, requiring heirs to use the home as their primary residence to avoid reassessment at market value.
Two major Prop 19 changes from Prop 13.
Property Tax Base Transfers (For Homeowners 55+, Disabled, or Disaster Victims)
Eligible homeowners can sell their primary residence and transfer their current, lower assessed property tax value¹ to a new primary residence anywhere in California.
¹ Taxable value means the base year value plus inflationary adjustments, commonly referred to as the factored base year value.
Eligible Applicants: Homeowners who are 55 or older, severely and permanently disabled, or victims of a Governor-declared wildfire or natural disaster.
Usage Limit: Homeowners 55+ and the disabled can use this benefit up to three times. Disaster victims have no limit.
Value Rules: You can buy a more expensive home; however, the difference in market value between the old home and the new home is added directly to your “Taxable Base Value”, which is the base year value plus inflationary adjustments. (Note: In cases where the transferor died, the date of death is considered the date of transfer.)
Timing: The sale of the original home and the purchase/construction of the replacement home must happen within two years of each other.
Example I:
Bill and Jane, ages 65 and 64, respectively, will be selling their home in Northern California and moving to Southern California to be closer to family. Below are two different scenarios where the Fair Market Value (FMV) of the new residence is larger and lower than the FMV of the original residence:
Higher FMV Lower FMV
FMV of So. Cal Replacement Residence $1,800,000 $1,200,000
Fair Market Value of No. Cal Property $1,400,000 $1,400,000
Excess (Deficit) FMV on New Residence $400,000 ($200,000)
Taxable Base Value of No. Cal Residence $300,000 $300,000
New Taxable Base Value (So. Cal) $700,000 $300,000*
*No Reduction in Taxable Base Value for lower FMV of new residence
How to Apply: Submit Form Board of Equalization BOE -19 -B: Claim for Transfer of Base Year Value to Replacement Residence for Persons at Least Age 55 Years to the County Assessor where the replacement property is located. See BOE website for related forms for Disabled Individuals and Disaster Victims.
2. Family Transfers and Inheritances
Prop 19 allows transfers of a family home between parents and their children or grandchildren (parents of the grandchild must be deceased) without triggering a change in ownership for property tax purposes. However, Prop 19 severely restricts the previous property tax exemptions for transfers among family members:
Primary Residence Only: Parent-to-child (and grandparent-to-grandchild) exclusions now only apply if the inherited property is the transferee's primary residence.
Principal Residence Requirement: To keep the original low tax base, the child or grandchild must move into the home and file for the California Homeowners' Exemption within one year of the transfer.
Fair Market Reassessment: If the child does not use the home as their primary residence, it will be reassessed at the current fair market value.
There is a Limit Of Excluded Value. The value limit is equal to the property’s taxable value at time of transfer plus $1 million. If the market value exceeds this limit, the difference is added to the taxable value. (see example II below).
Other Properties Excluded: The inheritance tax exclusion no longer applies to vacation homes, residential rental properties, or commercial properties; all of these are reassessed at current market value upon transfer.
Example II:
Bill and Jane, ages 65 and 64, respectively, will be selling their home² in Northern California to their son, William. The value of the replacement residence does not come into play in determining the new Taxable Base Value for William, but it does when Bill and Jane were transferring their basis to another home (see Example 1)
Fair Market Value of No. Cal Residence $1,400,000
Taxable Base Value of No. Cal Residence $300,000
Excess FMV of No. Cal Residence $1,100,000
Exclusion Amount ($1,000,000)
Additional Value to No. Cal Residence $100,000
William’s (son) Taxable Base Value $400,000 ($300K + $100K)
² The residence is not required to be sold to children to receive a lower tax base. The rule applies to property that is inherited by the children as well.
How to Apply: Submit Form Board of Equalization BOE -19 -P: Claim for Reassessment Exclusion for Transfer Between Parent and Child Occurring On or After February 16, 2021, to the County Assessor where the property is located. The application must be filed within three years of the transfer date.
During retirement, one of the most critical decisions involves what to do with your home. Do you keep it? Sell it? Rent it? All of these questions involve a lot of moving parts. Anthony B. Carr, CPA, CFP®, MBA, can help analyze your planning goals and provide expertise in investment management, tax planning, distribution planning, health care, and estate planning. See Anthony B. Carr’s Blog “Your Home – Sell it, Rent it, or Keep it!”
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