On election day, the narrow passage of Proposition 19 in California brought good news for some homeowners. The new law allows homeowners who are over 55, disabled, or victims of wildfires or other disasters to transfer the tax base of their primary residence to a replacement residence. This expands on the current law which allows homeowners over 55 to retain their tax base within their own county or some reciprocal counties, rather than statewide.
The change will mean considerable savings on real estate tax, since increases are limited to 2% per year and only reassessed at the sale, with a few exceptions. For those who live in their homes for a long time, their tax assessment is often much lower than a current assessment would be. Previously, the new home had to be the same or lower value than the replacement property to qualify, but now the tax value of the new home will be added to the current tax assessment if the new home is more expensive. Homeowners can do this type of transfer three times with two years to sell their current home, buy a new one, and transfer the tax base.
Unfortunately, there was also some bad news, specifically for parents who are planning to transfer real estate to their children during their lifetimes, as part of their estate planning, or just to help their children or grandchildren. To help pay for the lost revenue from expansion of tax base for replacement residences to elders, the law includes new restrictions on real estate transfers from parents to their children, which are currently able to retain their assessed tax base after transfer.
As of February 16, 2021, to qualify to keep the current assessed value, the transferred property must now be used as the child or grandchild’s primary residence. If the recipient doesn’t live in the inherited home, and rents it out or uses is a second home instead, the tax value will be reassessed. This is a change from current law which allows family members to transfer a home without the value of the property being reassessed. Currently, they can also transfer other rental or commercial properties and be exempt up to $1 million of the assessed value. Under the new regulations, these transfers will trigger a reassessment, which would likely significantly increase property taxes.
There may be opportunities to shore up estate plans before this part of the law goes into effect, although you always want to be careful about making irrevocable transfers under time pressure. If real estate transfers were on your radar or already included in your estate planning, it makes sense to revisit with your estate attorney to see if there are opportunities to take action before the law goes into effect.
For those over 55, the increased flexibility of the law will allow more choice about where to live once their children are on their own. Often empty nesters do not necessarily want to downsize, since they want room for kids (and grandkids) to visit, but they may want to move to a new location. The new law will broaden planning opportunities for the big decisions about where to move for retirement or even pre-retirement, once over 55. This part of the law goes into effect on April 1, 2021.