Passed by voters in November, Proposition 19 has two separate components that go into effect early this year.
The new rules for inherited properties will go into effect on February 16, 2021. This component outlines stricter requirements for retaining the tax basis on family property transfers. Most notably: the tax benefit is limited to transferring a primary residence to a child (or grandchild transferee in limited circumstances) who will continue to use the property as a primary residence.
The second portion of the law will go into effect on April 1, 2021. This component gives homeowners more “room to move” when they change residences across the state. Specifically, those who are 55+, disabled or victims of a natural disaster that caused the loss of their home now have greater ability to transfer their tax basis to a new home anywhere in California rather than being limited to specific counties.
Both of these changes have some notable impacts, so I wanted to share some answers to common questions that many of you are asking:
How does Proposition 19 change the rules on tax basis portability?
Prop 19 allows a homeowner who is 55 years of age or older, severely disabled or whose home has been substantially damaged by wildfire or natural disaster to transfer the taxable value of their primary residence to a replacement primary residence:
a) anywhere in the state,
b) regardless of the value of the replacement primary residence (but with adjustments if replacement has a greater value),
c) within two years of the sale
d) up to three times (or as often as needed for those whose houses were destroyed by wildfire).
The prior rule limited this exemption to a one-time transfer within the same county (Prop 60) or between certain counties (Prop 90) and only if the replacement property was of “equal or lesser value.”
Can I buy/sell now and take advantage of the tax portability benefits before April 1, 2021?
Prop 19 requires that the sale of the primary residence and purchase of a replacement primary residence take place within two years of each other, but Prop 19 does not make it clear if the purchase and/or the sale have to occur after April 1, 2021. The Board of Equalization Chief Counsel has published a non-binding memorandum indicating that either the purchase or the sale must occur after April 1, 2021 in order to qualify, but this is not established in the law. We strongly encourage you to seek the advice of a qualified California real estate attorney or tax advisor.
If the replacement property is of equal or lesser value, does the tax basis of the replacement property change?
No. The taxable value of the original property may be transferred and become the taxable value of the new one. For example, if a seller of an original property has a $300,000 taxable value and full cash value of $1M and then buys a replacement property for $600,000, the taxable value of the replacement property would remain at $300,000.
If the replacement property is of greater value, how is the new taxable value calculated?
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. For example, if a seller of an original property has a $300,000 taxable value and a full cash value of $1M and then buys a replacement property for $1.5M, the taxable value of the replacement property would be $800,000.
Can a replacement property be purchased prior to the original primary residence being sold?
Yes. This is how the current rule under Prop 60 works, and Prop19 uses nearly identical language.
How does Prop 19 affect the rules on intergenerational transfers to children or grandchildren?
It limits the exemption to those properties where the primary residence continues to be used as a family home by the child (or grandchild transferee in limited circumstances). If so, the taxable value will remain the same, 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, what is the new taxable basis?
The new taxable basis will be the assessed value of the property at time of transfer minus $1M.
Where may a claim to transfer a tax basis be made?
Claims may be made with forms provided by the local county assessor’s office.
Circumstances are unique in each purchase or sale of a property. Federal tax implications should also be considered. REALTORS® are not qualified to give tax or legal advice. We strongly advise you to seek the advice of a real estate attorney or tax advisor for more personalized guidance for your particular situation.