#prop13

By:  Crystal Kessler, CFP®, Wealth Advisor/Financial Planner

Proposition 19 limits property tax increases for seniors, disabled persons, and disaster victims needing to replace their home, and limits property tax increases on transferring family homes used as primary residences. Proposition 19 or The Home Protection for Seniors, Severely Disabled, Families, and Victims of Wildfire or Natural Disasters Act was built off the passage of Proposition 13 back in 1978. Prop 13 limited the amount of property taxes to 1% of a property’s assessed value and capped any increase for assessments at 2% a year. Prop 13 only allows property to be reassessed at market value if there is a change in ownership or new construction. Now with Prop 19, it allows a primary residence’s taxable value to transfer as is to:

1. Individuals over age 55, severely disabled, and disaster victims to transfer their “taxable value” of their primary residence ANYWHERE in the state of California to a replacement residence. However, there are stipulations that apply which will be explained below.
2. A transfer of a family home or family farm between parents and their children if the property continues to be a family home. The child must live in the home as their primary residence and meet a value test, explained below.
3. A transfer of a family home or farm between grandparent’s and their grandchildren with the same stipulations for transfers between parents and children and the value test, but to qualify for this transfer the parents of the grandchild must be deceased.

For seniors over age 55, severely disabled persons, and disaster victims to transfer their original taxable value, the replacement residence or newly constructed residence must meet certain requirements:

• Replacement residence must be purchased within 2 years of the sale of the original home.
• Original and replacement property must be eligible for the homeowners’ or disabled veterans’ exemption meaning one must occupy the property as their primary residence.
• An application must be filed to transfer the owners’ current taxable value to the replacement residence.
• For disaster victims and severely disabled, they can be of any age, but the above requirements still apply.
• For disaster victims, the damage must be from a wildfire, or a Governor declared disaster.

Important Note: There is no limit to the market value for the replacement property compared to the original primary residence, but the replacement property market value amount above the original primary residence market value is added to the transferred taxable value.

Example: Joe and Susie ages 60 and 61, living in Los Angeles want to move closer to their children in San Diego now that they are retired. Joe and Susie bought their home in 2001 when their original taxable value was $300,000. Over the years their primary residence has grown to be $1 million, but due to Prop 13 their property taxes have been capped on increasing and being reassessed at the properties market value. Now that they are moving, Prop 19 will allow them to transfer their current taxable value of their original property to the replacement property.

1. If the market value of the replacement property’s value is more than the market value of the original primary residence, then the excess amount will be added to the taxable value when transferred. Meaning, if Joe and Susie find their replacement property is over $1,000,000 (what their current home’s fair market value is) and for example purposes we will say the replacement property is $1,100,000, they will have to add the difference of the $100,000 to their taxable value. Therefore, the taxable value of the replacement property will be $400,000 (original tax value transferred, $300,000, plus the excess market value of the replacement property, $100,000).
2. However, if the replacement property’s market value is less than or equal to the market value of their current primary residence, then the taxable value will transfer to the replacement residence with no adjustment needed. Meaning, if Joe and Susie find their replacement property is $1,000,000 or less then they will transfer their current property tax values from their original home of $300,000 to the new primary residence due to Prop 19.

For transfers between parents and children, and grandparents and grandchildren the rules work a little differently. To qualify and transfer the original taxable value of the parents or grandparent:

• The home must be eligible for the homeowners and disabled veteran’s exemption with the exemption applied for within one year of transfer or purchase.
• The assessed value of the new home when purchased or transferred must meet a value test. The value limit equates to the parents or grandparents’ taxable value at time of transfer plus $1 million. Any amount over the value test limit is added to the taxable value for the child or grandchild.
• The child or grandchildren are required to maintain the home as their primary residence for the remainder of their life.  If they turn the property into a rental or live in another home, that will trigger a tax reassessment on the property creating larger property taxes.

Example for value test:  Lauren and her daughter Lisa live together in Los Angeles. Lauren bought their home in 2000 when her original taxable value was $200,000. Due to Prop 13 Lauren’s property taxes have been capped on increasing and being reassessed at the properties market value. Lauren wants to transfer the home to her daughter Lisa. Prop 19 will allow them to transfer Lauren’s current taxable value of her property to Lisa if it passes the value test. The original taxable value of Lauren’s property, $200,000, is referred to as the Factor Based Year Value (FBYV). Prop 19 allows for the value limit to equal the FBYV of $200,000 plus $1 million dollars.

1. Over the years, the market value of Lisa’s home has increased to $900,000. Since the market value is under the value limit of $1.2 million ($200,000 FBYV + $1,000,000), Lisa will receive the original taxable value as Lauren with no additional property taxes.
2. Let’s say the market value increased to $1.3 million. Since the value limit is $1.2 million, Lisa will have to add the difference of $100,000 ($1.3 million – the value limit of $1.2 million) to the original taxable value. Thus, the new taxable value for Lisa would be $300,000 ($200,000 original taxable value + $100,000 difference).

As you can see, the benefits of Prop. 13 and Prop. 19 play hand in hand and are great for many California taxpayers, and especially advantageous for seniors, severely disabled, disaster victims.

Prop 19 replaced Proposition 58, which provided a more favorable transfer of real estate from parent to child. The changes are more restrictive for gifting property to children and grandchildren (i.e., primary residence requirement, value test, and non-primary residence elimination). 

If you own a home in California with a low tax basis and would like to keep the property in the family, talk with us and your estate planning attorney. If you would like to contact us, please speak with your advisor or you can reach us at financialplanning@bfsg.com.  

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