Identifying & Accessing CA Property Tax Breaks

California Proposition 19

California Proposition 19

Californians more or less take for granted the fact that the tax breaks provided by property tax measure Proposition 13, passed by a veritable landslide by voters in 1978 – locks in a home’s “base-year value” to reflect what it was when the real estate changed ownership most recently. As we all know, this caps yearly property tax increases at a 2% tax rate – up until the time the property changes ownership again.  All property tax relief measures in California exist to allow property owners of all kind to continue avoiding property reassessment.

As most of also know by now, the portion of property that is transferred, upon changing ownership, is reappraised to current market value. Obviously, if that real property has appreciated in value since the new transfer – the outcome could be a serious increase in the new owner’s property tax bill!

On the other hand, California does allow for exceptional property tax exclusions to the rules and regulations that now govern a change in ownership for married or unmarried couples, families and property co-owners that wish to avoid property tax hikes. Naturally, there are requirements. California’s property tax exemptions are written into the California State Constitution (Article-13), unlike many other states, which utilize exclusions  from property reassessment that are controlled by state tax laws  or local rules and regulations. 

California initiatives managed by County Tax Assessors, that are based on personal, individual data, as opposed to state statutes, would be, for example:

A primary residence: of which the initial $7,000 of the full value of a home is excluded, or exempt, from property tax.

Combat Veterans: can qualify for a substantial exemption. This can be claimed by someone serving presently in the military who is no longer serving, but has been honorably discharged. The same applies, under similar requirements, to an unmarried surviving spouse or the parent of a veteran that is deceased. Although, whomever is submitting the claim cannot own real estate or personal property that exceeds more than $5,000 if the claimant is single, or $10,000 for a couple that is submitting.

Disabled veterans: can receive a larger exemption. Exactly what that number is depends on income, age, and specifics regarding the disability. BOE website explains as follows – https://www.boe.ca.gov/proptaxes/dv_exemption.htm#Description

Senior Homeowners: over the age of 55 who purchase a new primary residence in any of the 58 counties in California, and sell that residence, can transfer the base-year value to the new primary residence – if the value of that property is equal to, or lesser than, the value of the previous home… Or if it is newly constructed inside of 2-years from the sale of the original home. As the BOE discusses on their site

Family transfers: are usually described in real estate or tax literature as children leaving property to parents, and parents to their children, but we all know 99% of the time it is a parent leaving a home or business property to their children/heirs.

Proposition 19: which was Proposition 58, still allows your surviving parent to leave you their primary residence – thereby  avoiding  property reassessment as long as you’re moving in as your primary residence, with an entire year to settle in.  Upon inheriting property taxes under these requirements, property tax transfer will typically result in the ability to transfer parents property taxes successfully – to keep parents property taxes for as long as the residence is resided in by the inheritor.

Avoiding property reassessment, similar to a Parent to Child Property Tax Transfer, is also possible if you inherit a home from your grandparents – however,  only should both your parents be deceased.  If the difference between the inherited property’s assessed value and current market value is over $1,000,000 upon inheritance and property-transfer, the newly assessed value will be its final current market value, minus $1,000,000.

Disaster relief: In some counties, if your home has been substantially damaged or destroyed by a disaster, you qualify for a reduced assessment.

How Will Proposition 19 Impact Middle Class Families in California?

How Will Proposition 19 Impact Middle Class Families in California

How Will Proposition 19 Impact Families in California

Before Proposition 19 existed, parents in California could transfer their primary residence and $1,000,000 per parent of other property to their children without triggering a tax reassessment of  those properties. After Feb. 15, 2021 that exemption, the parent-child exclusion,  was watered down, limiting access to this time-honored exclusion from current property tax rates to moving into an inherited home only as a primary residence;  and limiting a beneficiary’s ability to go about avoiding property tax reassessment in CA to a strict 12-month move-in period. 

As long as this deadline is kept, heirs will be avoiding property tax reassessment in CA without issue.  An heir’s ability to transfer parents property taxes when inheriting property taxes, and the right to keep parents property taxes on any property tax transfer from a parent, as Proposition 19 parent to child transfer, or Prop 19 parent to child exclusion, is guaranteed.  As is the right for a beneficiary to get a trust loan from a trust lender to implement a  transfer of property between siblings… In other words, you can lock in a low Prop 13 property tax base plus buyout co- beneficiaries if they want to sell their inherited property.  Amen!  And in the midst of the Coronavirus crisis, with rampant unemployment and under-employment… a 6-figure trust loan could be a life-saver.

After Feb. 16, a transfer of a principal residence by a parent to a child (heir) is only exempt if the parent was using the property as their principal, or primary, residence; and the heir is also residing in the inherited home as a primary, principal residence following the parental property transfer.  If that is not a problem, we’ll most likely see an equivalent number of middle class and blue collar families avoiding property tax reassessment in CA as before Prop 19 became law. 

Even if only half as many people as before take advantage of the Prop 19 parent-child exclusion, 50% is still a pretty healthy number.  No other transfers of property between parents and children will be exempt from reassessment, with the exception of a family farm, which is currently defined but as “farmed land” whether the property includes a residence or not. 

Transfers that are excluded from property tax reassessment do have limitations, however.  The exclusion applies only as far as the assessed value at the time of transfer plus $1,000,000. Any property beyond that value would be reassessed at a current market tax value.

Housingwire.com recently wrote: “Prop 19 will deliver needed funding for cities, counties, and school districts when they need it most. It will generate hundreds of millions in annual revenue for fire protection, affordable housing, homeless programs, safe drinking water, and other local services and dedicated revenue for fire districts in rural and urban communities to fix inequities that threaten life-saving response times to wildfires and medical emergencies.”

So how will Proposition 19 impact the middle class, working family  housing market in California, admittedly an expensive state to live in.  Although certain components in California will benefit from a new property tax revenue stream, regular middle class and blue collar families residing in inherited homes may still find it difficult keeping up with the rising costs and expensive lifestyle of California. Yet Prop 58 can still help. Proposition 58 Property Tax Breaks are still in place, despite restrictions.  Providing you intend to occupy an inherited home as your primary residence you can still save as much as $10,000 annually in property tax savings.  

President of One80Reality, Nick Solis, tells us:  ““We are definitely  going to see property taxes rise on inherited homes. California is one of those places where blue collar workers usually pass down homes to kids and other family members. Those homes are now going to be taxed at a much higher rate. It will force their hands to sell, because the properties will be more expensive to retain.”

Mr. Solis said he’s not worried about selling homes, but a new demographic of home buyers is going to emerge. He tells us: “Not     all who receive inherited homes come from money. Many blue collar workers and families bought in previous decades when homes were affordable, and are passing them down to their kids. They will see a tax increase. We’re going to see a different demographic. We were already seeing a major push of middle class and blue collar people,  that could afford a home in places like the Bay area, now moving into the central valley or other more affordable places because they just feel too uncomfortable living in their current homes. And now taxes are going to be even higher on inherited homes.”

A well known California realtor, who preferred to remain anonymous,  recently claimed: “With higher property taxes, keeping inherited homes as rental properties may become unprofitable, estate-planning attorneys are going to be very busy, as this new law may cause many people to decide to sell properties that they intended to pass on to their heirs.” 

Millennials and other younger generations will be impacted as well, avoiding property tax reassessment in CA People in their early twenties might decide to leave California, with no plan to ever return.  This is quite different than recent years, where the state was attracting a lot of young starter-home buyers. The same young adults are now looking carefully for more affordable homes, after graduating from college – even if that means leaving the state completely, with a new job; and perhaps a new family.

Another seasoned California realtor told us, on condition of remaining anonymous:  “It’s a real game-changer.  Both in terms of California properties being sold that would have been passed on through a family trust, or by the beneficiaries who decide they either can’t afford to pay property taxes based on a current assessed value, or just don’t want to pay the higher property taxes. The state’s going to make a lot of money.”

Higher property taxes or not, California will always be an attractive place to live. There is sunshine 12 months per year, an ocean nearby, convenient cities and yet rural areas 30 minutes away… “People are always going to want to live in California, but I can see life getting more expensive here a lot faster than I expected,” Mr. Solis added.