If you own an real estate investments in California, the property tax caps offered by Prop 13 can play a crucial role in your investments when it comes to inheritance. The property tax situation in California has again been dramatically altered by the passage of the landmark California tax Prop 19 on November 2020, which went into effect on February 16, 2021.
What changes are being made?
Prop 13, which passed in 1978 to keep taxes down for apartment owners, capped the tax increase year after year to only 2% per year while the value of the property goes up. This deal becomes sweeter the older you get, but it keeps seniors from wanting to move, worried that they will pay much higher taxes if they go buy a new house.
Prop 13 allowed Californians to take a lower tax base and move it to a new home if the new home is worth less than the old home, only once per lifetime, and only into the same or select counties.
The newly passed Prop. 19 allows:
- Sellers who qualify to transfer the tax basis of their primary residence to a replacement property anywhere in the state of California. Previously, inter-county transfers were done on a limited basis.
- Sellers who qualify to transfer the tax basis of their sold property to their replacement property regardless of value. Previously, transfers had to be only to properties of equal or lesser value. (Some adjustments will be made if the property is of greater value)
- Sellers who qualify take advantage of this benefit up to three times – and victims of wildfires and other natural disasters have no limitations. Previously, sellers could only make use of this transfer one time.
Finally, the tax transfer benefits go into effect beginning on April 1, 2021.
Prop 19 Takes Away Some Tax Benefits for Intergenerational Family Transfers
Prop 19 also raises property taxes by ending the inheritance tax break. Under Prop 19, the only time an intergenerational property transfer is not subject to a tax reassessment is when primary residence is transferred to a child or grandchild, and the person continues to use the residence as a family home. Even then, if the difference between taxable value and actual value is more than 1 million, some upward adjustments on the taxable value will be imposed.
This transfer rule begins on February 16, 2021.
However, if you inherit income producing property such as rentals or a strip mall, your property taxes will go up.
Analysts believe it will increase property taxes by a few hundred million dollars per year, most going to fire protection, and some to local governments.
Who can take advantage of prop 19?
All Californians who are over 55 yrs of age, are severely disable, or own a home that has been substantially damaged due to wildfire or a natural disaster.
Who qualifies as severely disabled?
Per tax code section 74.3, any person who has a physical disability or ailment, whether from birth or by or by reason or accident or disease, that results in a functional limitation as to employment or other activities can likely qualify as “severely disabled.”
If I sell my property now, do I need to wait until April 1, 2021 to purchase another home?
As long as either the sale of an existing home or the purchase of a new one occurs after April 1, 2021, the transaction will be eligible for Prop 19 benefits – as long as both transactions were completed within two years of each other. If you’ve already transferred your property tax base once, you must wait until after April 1st, 2021 to do so again.
Can I purchase a replacement property before selling my primary residence?
Finally, Prop 19 will help keep the real estate market rising by giving seniors, the severely disabled, and people who have been affected by natural disasters the opportunities they need to move into their dream homes.