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Prop 19 - Big News for Homeowners

Prop 19 Passes in California - transfer tax base
Proposition 19 was approved by voters in November of last year, but it will soon take effect. Many homeowners in our area have expressed interest in this new proposition since they could be eligible for fairly significantly property tax savings when they move, especially if they have lived in their home for some time and the value of their home has increased substantially since it was originally purchased.

A practical example of Proposition 19

Before Proposition 19, if Barry Buyer bought a home in 1975 for $200,000 and the property was now worth $1 million, Barry may have resisted selling even if the house was too large and he was tired of the upkeep or climbing the stairs of his multi-story home had become too much for his knees. To sell and downsize to a smaller home worth $500,000, unless he moved to a county with reciprocity and could transfer his property tax basis, Barry would wind up paying more than twice the property taxes he was paying, and he’d be taxed on the $500,000 tax base rather the $200,000 base in his current home. For this costly reason, Barry stayed in his home despite really wanting to sell.

Under the newly passed Prop. 19, Barry is now free to sell his home and buy another home anywhere in California that is valued at $1 million or less and have his same tax base ($200,000). This represents a tremendous savings and removes one of the major barriers that prevented Barry (and many long-time homeowners in California) from selling his home and moving.

While the final details of this proposition are still coming together, we wanted to share the latest information with you which we recently received from the California Association of Realtors.

On November 3, 2020, California voters voted in favor of “Prop 19”, a proposition that would allow homeowners who are over 55, disabled, or wildfire/disaster victims to transfer primary residence’s tax base to a replacement primary residence anywhere in the state. This can be done regardless of the value of the replacement primary residence (but with adjustments if replacement has a greater value). It can be done within two years of the sale, and up to three times (or as often as needed for those whose houses were destroyed by fire.).

This tax basis portability portion of the proposition will take effect April 1, 2021. If a buyer/seller is interested in taking advantage of these tax portability benefits before April 1, 2021, then it is recommended they seek out a qualified California real estate attorney or tax advisor.

When it comes to how this affects the tax basis of the replacement property change, it depends on the value of the replacement property. If that value is of equal or lesser value, the tax basis does not change. But if the value of the replacement property is of greater value, “the new taxable value is calculated by adding the difference between the full cash value of the replacement property and the original property to the original taxable value,” as stated by the California Association of Realtors.

Keep in mind that you can proceed flexibly with this replacement property; it can be purchased prior to the original primary residence being sold. And if you wish to make a claim to transfer a tax basis, you can do so with forms provided by the local county assessor’s office.

If there is a intergeneration transfer to children or grandchildren, this Proposition “limits the exemption to those properties where the primary residence continues to be used as a family home by the child or grandchild transferee.” And if that is the case, the taxable value will remain the same. However, it is subject to some upward adjustments if the property value, at the time of transfer, is more than $1M over the original tax basis. If the property is more than $1M over the original tax basis, the new taxable basis will be the assessed value of the property at time of transfer, minus $1M. These new rules on intergenerational transfers take effect February 16, 2021.

If you are considering the sale or purchase of a home (whether you qualify for proposition 19 or not), fee free to contact me (415-342-4537, [email protected]) or reach out to your Bay Area Modern Realtor.  Our team of Bay Area Realtors is skilled in Bay Area real estate and we'd welcome the opportunity to put our experience to work for you!

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