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Proposition 19: Understanding the Basics of How To Transfer Your Tax Basis

This is a topic that has recently come up with a couple of clients and figured it may be top of mind for others. Let me start off by saying if you are looking for legal or financial advice, contact an attorney and/or CPA. We are talking in the context of Real Estate. If you have more questions about buying and selling with Prop 19, ask away!

Proposition 19 : The Home Protection for Seniors, Severely Disabled, Family, and Victims of Wildfire or Natural Disaster

Approved by voters in 2020, Proposition 19 replaces Proposition 60 and 90 and allows for the transfer of your properties tax basis.

What is the tax basis? When you purchase a property your property taxes are based on the purchase price. This is the tax basis. It is the starting point essentially of how much taxes you will pay for a property. These do go up. The state can increase up to 2% each year and then any additional local tax liens voted on and approved can also increase your property taxes.

What Does Proposition 19 do for me and who can utilize it?

Proposition 19 changed the criteria for how several different existing Propositions operate. Note that you must transfer your tax basis within 2 years (similar to before).

Proposition 60, 90 and 110 Transfer of Tax basis for 55 and older and Disabled

  • Proposition 60, 90 and 110 allowed people over 55 or severely and permanently disabled people to transfer their tax basis of the existing home to a replacement home as long as the value of the replacement property was less or equal to the current market value of the original home. With both Prop 60 and 90, the transfer of the base year value must happen within two years. This means that the homeowner must sell and buy a new residence within two years. In addition there were limitations on which counties in CA you could transfer your tax basis.
  • Prop 19 modified the previous provisions, and now allows eligible homeowners to transfer the taxable value of their existing primary residence to a new replacement primary residence. The replacement residence can be of any value*, and anywhere within the state. The exclusion can be filed up to three times by a property owner over their lifetime.
  • You can buy a replacement property before you sell your 1st primary residence but you will pay taxes based on the purchase of your replacement property until you sell your 1st primary residence.

Proposition 50 & 171 Disaster Relief Tax Base Transfers

  • Prop 50 provided that the base year value of property that is substantially damaged or destroyed by a disaster, as declared by the Governor may be transferred to comparable property within the same county.
  • Prop 171 allowed the transfer of the base year value of a principal residence to a county that has adopted the ordinance.
  • Prop. 19 allows homeowners to purchase a replacement home of greater value than their original home and transfer their tax base with an adjustment to account for the value difference in cases of homes destroyed by wildfires or other natural disasters.

Propositions 58 and 193 Parent-Child Transfers & Grandparent-Grandchild Transfers

  • Prop 58 and 193 allowed parents and in certain cases grandparents to transfer their existing property tax basis of their principal residence of any value without triggering a re-assessment (even if the property was used a rental property by the child)
  • Prop 58 and 193 allowed for the inheritance of property assessments for up to $1 million in additional real estate, whether residential or commercial.
    Prop 19 changes how this is all done. There are a new set of rules and transferring the tax basis is not a guarantee. With the new set of rules it is likely in many if not most cases that when the property is transferred from parent to child or grandparent to child, the property is re-assessed at current market value
  • The below are requirements for consideration in this type of transfer:
    • The property must be the principal residence of the parent(s) or grandparent(s)
    • The property must become the principal residence of the child or grandchild within one year, and all applicants must have a valid Homeowners’ Exemption (HOX) filed within 1 year of the transfer in order to qualify for this exclusion.
    • Only the principal residence of a parent(s) or grandparent(s) qualifies for a base year value transfer. Other property, residential or commercial no longer qualify for this benefit

How Does the Transfer of Your Tax Basis Now Look Under Prop 19?

 

If the market value of the replacement residence is less than or equal to the market value of the original, then the taxable value will transfer to the replacement residence with no adjustment needed.

Original Taxable Value =$300,000  Original Market Value = $900,000

Replacement Market Value = $700,000

Since the market value of the replacement is $200,000 less than the original’s market value, the taxable value transferred to the replacement will remain at $300,000

If the market value of the replacement residence is more than the market value of the original, then the excess will be added to the taxable value transferred at market value.

Original Taxable Value = $300,000  Original Market Value = $900,000

Replacement Market Value = $1,400,000

Since the market value of the replacement is $500,000 more than the original’s market value, an adjustment to the transferred taxable value is made to add the difference in value. Therefore, the taxable value of the replacement will be $800,000 ($300,000 +$500,000).

 

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