The Property Tax Transfer & Creative Affordability
In some instances the California property tax transfer is being used for creative affordability based on the intergenerational transfer provision. Property tax portability was increased with the provisions included in CA Proposition 19 – The Home Protection for Seniors, Severely Disabled, Families, and Victims of Wildfire or Natural Disasters Act. In February 2021 the provision that allowed intergenerational transfer to child transferee or grandchild transferee opened the door to new means of affordability for those hoping to buy a new home.
Proposition 19 – Property Tax Portability
Proposition 19 changes tax basis portability for certain California homeowners. These changes were made effective April 1, 2021.
Certain homeowners may transfer the taxable value of their primary residence to a replacement primary residence. This can happen anywhere in California (no County restrictions), within two years of the sale of the original property. This benefit can be used up to three times, except there is no limitation for those whose houses were destroyed by fire.
This article covers:
- What is Property Tax Portability?
- Who is eligible for Tax Basis Portability?
- What if there is a co-owner on the property who is not eligible?
- Changes from the earlier rules – Propositions 60 and 90 and 110
- Where do I apply?
- How do we calculate our tax basis for future purchases beyond the first transfer?
- Tax basis portability for intergenerational family transfers
What is Property Tax Portability?
Property tax portability is a way to reduce the assessed value of your home. As a result, those eligible enjoy lower property tax liability.
Normally, real estate property tax calculation is based on the property’s assessed value. The assessed value usually resets to the sales price, whenever a new buyer purchases a property. During the period while owning the home, the assessed value goes up by a maximum of only 2% each year.
With property tax portability, you can actually transfer the current assessed value of your home, to your next home. For example, you own a home with an assessed value of only $400,000. You sell it for $800,000, and buy a home for $750,000. Instead of a new reassessed value of $750,000, you can apply to have the assessed value reset to the exit property assessed value of $400,000. This lower value could save you approximately $2800 per year in property taxes. An example of a recent client’s savings can be found below.
Who Is Eligible?
Tax basis portability is available to homeowners:
- 55+ years of age (as of the date of the sale), or
- severely disabled, or
- whose home has been substantially damaged by wildfire or natural disaster.
Also extremely relevant, the replacement property can be purchased prior to the sale of the current home.
What if there is a non-eligible co-owner?
The Board of Equalization released a clarification for this question on May 11, 2021, which can be found here. There is no requirement that the homeowner who is over 55, or severely and permanently disabled, or a victim of a wildfire/natural disaster, be the sole owner of either the original primary residence or the replacement primary residence.
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Changes from Propositions 60 and 90 and 110
Proposition 19 grants more freedom over the older Propositions 60, 90, and 110. There are no more county or sales price restrictions, and people can use this benefit more than once in a lifetime.
Proposition 19 – No More County Restrictions
These older rules limited the location of the properties. Proposition 60 restricted the tax basis portability to properties within one county. Proposition 90 expanded that to a specific list of counties, so you could sell in one county and buy in another, but only if the other county was on the list.
Now, with Proposition 19, instead of limiting the counties of transfer, you can use this benefit anywhere in California.
Proposition 19 – No More Sales Price Restrictions
Under Propositions 60 and 90, only transfers of “equal or lesser value” were eligible for tax basis portability.
Proposition 19 now allows the transfer of the tax basis regardless of value. However, there are certain adjustments to the tax basis if the purchase price of the replacement property is higher than the sales price of the previous home.
Equal or Lesser Value
The tax basis can transfer if the replacement residence is of equal or lesser value. The rules even allow for an inflation index of 105% if purchased within one year, and 110% if purchased within the second year of the original property’s sale.
From a Lower Value to a Higher Value
Under Propositions 60 and 90, if the replacement residence had a higher market value, you weren’t eligible for the benefit. With Proposition 19, you are still eligible. The new taxable value is calculated by adding the difference between the full cash value of the replacement property and the original property to the original taxable value. For example, here’s how you calculate your benefit:
if a seller of an original property has a $300,000 taxable value (current assessed value) and a full cash value of $1M (current sales price/market value) and then buys a replacement property for $1.5M, the taxable value of the replacement property would be $800,000. This increase of $500,000 increases the assessed value of the first home; $300,000 + $500,000 = $800,000 the new assessed value. So, instead of paying property taxes based on $1.5M you pay based on only $800,000.
Proposition 19 – Benefits Extend Beyond One-Time-Only
Instead of once per lifetime, Proposition 19 allows the property tax basis transfer up to three times. One exception is there is no limitation for those who lost their home in a fire. If you have already used Proposition 60 or 90 to avoid reassessment, this does not count toward the three times you are allowed under Proposition 19. You are allowed the tax basis transfer up to three times under Proposition 19, regardless of whether or not you have transferred your tax basis in the past.
Basis Calculation After the First Property Tax Transfer
Check with the State Board of Equalization to clarify how the tax basis is treated with multiple transfers. When I reached out to their office, I was informed the tax basis moves with you, from property to property.
Intergenerational Family Transfers
Please remember, I’m a real estate broker, not an estate planner. Contact your estate planner or attorney to find out how Proposition 19 will affect you.
Proposition 19 also changes the property tax transfer rules on properties with intergenerational transfers.
Before Proposition 19, homeowners could transfer a principal residence to their children and grandchildren, without a property tax reassessment. According to Proposition 19, the property must continue to be a principal residence after the transfer, in order to qualify for the exemption.
Finally, if the market value of the property is over $1 million higher than the current assessed value, the property is subject to a higher taxable value. The new taxable value is the current assessed value minus $1 million.
These new rules for intergenerational family transfers apply to any purchase or transfer beginning February 16, 2021.
For More Property Tax Transfer Information
California voters passed Proposition 19 in November 2020. You can refer to California’s Constitutional Amendment for more details about the constitutional amendment.
Finally, contact your attorney, estate planner, or tax professional to determine how Proposition 19 affects you.
SAN FERNANDO VALLEY SOUTH
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