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:
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:
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.
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:
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.
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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