Prop 19 in San Diego, California added new legislation that governs real estate purchases and property taxes in the state.
This part of Proposition 19 went into effect on February 16, 2021, and there are very specific restrictions on inherited property when it comes to tax reassessment.
Prop 19 is also significant in terms of how it would help older San Diego residents who choose to sell their current homes. The legislation allows retirees to travel freely around the state several times per year and carry over their current property tax basis (with certain exceptions which we explain further in this post).
Although you can consult with your financial advisor about specific issues, we will clarify Proposition 19 and how it will impact you. We'll also go through the benefits and drawbacks of Prop 19 so you can make an informed decision as part of your retirement planning.
Prop 19 is intended to make it more affordable for seniors or older homeowners to sell their primary residence and relocate to another part of the state. Eligible California properties can be sold and their property tax bases transferred beginning April 1, 2021. That means you can have the same property tax basis even though you move around the state.
Prop 58 also permitted some homeowners to prevent reassessment and save money on property taxes by using the assessed value of their former house, but only if they moved within the same county. Prop 19 changes how this works, allowing qualifying homeowners to move their tax basis not only within the same county, but anywhere in California. In addition, homeowners would be allowed to transfer up to three times and bear their property tax basis (subject to some restrictions), rather than just once. Finally, if they buy a much more expensive house, they would face a blended assessed tax value. The legislation is intended to encourage more real estate sales while easing the property tax burden on older Californians.
Prior to the passage of Proposition 19, Proposition 58 provided for this tax basis switch, but with several more restrictions.
Here's a quick rundown of what's new with Proposition 19.
Eligible homeowners include those over the age of 55, those who are disabled, and those who have lost their home due to a natural disaster.
Let's break down each of these new conditions so you know exactly how and when you can use Prop 19.
One of the most significant advantages of the current Prop 19 is that the property eligibility has been significantly expanded in comparison to Prop 58. As previously stated, Prop 58 only permitted a qualifying homeowner to benefit from the tax basis transfer if the new property was located in the same county as the old home. Few counties in the state already had intercounty ordinances in place that provided for the transfer of assessments, but this was limited to only 10 counties in and around Los Angeles.
The replacement home can now be located anywhere in the state of California. This allows older people more mobility rather than feeling confined to one location due to financial constraints.
Prop 19, like Prop 58, retains the provision that the property in question be your primary residence. This property tax incentive does not apply to rental properties or holiday homes.
There is also a time limit that must be met in order to benefit from the evaluation transition. You have two years from the date of the sale to buy a replacement home or build a new home. Otherwise, you would be unable to take advantage of Proposition 19.
The next significant improvement is an increase in the value limits. In terms of California property prices, the new legislation requires homeowners to purchase a replacement home that is more valuable than their previous home. The improvement in value, however, is applied to the transferred taxable value of the old house.
Previously, the replacement home had to be of equivalent or lesser value than the selling of the current home under Prop 58. If the homeowner did not buy a house right away, there was some leeway to account for real estate appreciation:
In the first year after the selling of a house, you should expect to receive 105 percent of the property's value.
Within the second year after the selling of a house, the property's value has increased by 110 percent.
As Prop 19 goes into effect, you will be able to purchase a more expensive home and use a combined property tax valuation. The tax base formula subtracts the old home's value from the new home's value, then applies the old tax base.
In a hypothetical case, this will look like this:
Assume you've lived in San Diego for the past 30 years and your property tax assessed value is $300,000. If you sold your house for $1 million and bought a new home in California for $1 million or less, you will pass your previous taxable value (e.g., $300,000) to the new home. That is the taxable value. However, if you were to move to a $1.5 million home, the taxable value of your new home would be $800,000. The difference in increased value between the two homes ($500,000) plus the initial tax value ($300,000) equals $800,000 in the equation. It is a higher property tax assessment than before, but it is still far less than the property taxes on the new home.
Prop 19 increases the number of times a qualified homeowner can use the tax assessment switch. You can use this property tax relief clause up to three times if you qualify, while Prop 58 only allowed you to use it once. You could, however, use it twice: once for age and again for a subsequent impairment.
If you meet the age or disability criteria, you can now use it up to three times. If you are buying a home under the disaster relief requirements, you can also only use this clause once.
This allows older people to move for a number of reasons later in life. Perhaps you'd like to downsize after your children have graduated. You may want to be closer to family in another part of the state, or you might want to be closer to a healthcare facility. With a broader range of applications, you will be less concerned about what is the best time to make the step. Instead, you will make a more holistic decision free of the burden of high property taxes.
Prop 19 is densely packed with specifics, some of which benefit older California homeowners and others of which harm them, especially when it comes to estate planning. The greatest advantage, of all, is the extension of property tax savings for those aged 55 and over. The new legislation makes it simpler to use the tax exemption provision in the state and with blended assessments on a higher-valued new home. You can also use the clause up to three times.
On the negative hand, Prop 19 has now imposed tighter restrictions on how property can be inherited in California. If you want to leave real estate to your children, the property tax basis that you can pass on to them is now much more limited. For example, in order to prevent a property tax reassessment, the child (or children) must use the property as their primary residence immediately after death or gift. Also in this case, there is a new $1 million limit on the assessed property tax value exclusion. Furthermore, industrial and rental properties are no longer covered by this amendment.
Although the provisions of Proposition 19 for seniors go into effect on April 1, 2021, the administrative rollout is still in progress. You must qualify for the advantage by submitting a claim to the county assessor. Start by contacting your new county's assessor's office to learn how to apply and what documents are needed to show the new assessed value. Your D&Y Wealth advisor will also assist you in keeping track of new criteria when they become available.
Prop 19 undoubtedly brought about significant improvements in property taxes for senior citizens in California. If you're not sure how or when to take advantage of the new provisions, contact D&Y Wealth for assistance. Our advisors stay up to date with the new regulations to ensure that our clients are getting the most out of their relief options.
When it comes to transaction preparation, we are also pleased to work with your tax CPA. In reality, one of our signature services is collaborating with all of your financial services professionals (including your estate planning attorney).
Change can be beneficial, but it is also important to ensure that you completely comprehend the new requirements. Real estate choices are an important part of the overall financial strategy. Based on future real estate sales, we often run different retirement prediction scenarios for clients.
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