California Property Taxes and Prop 19 - Time for Seniors to Get Movin'

Prop 19 - Time for Seniors to Get Movin’

California property taxes are being changed once again. Here is a brief overview of California's property tax history. Due to California's Proposition 13, property taxes for real estate are fixed at 1% of the purchase price of real estate with annual hikes to match the rate of inflation, typically 2% a year. There are other assessments, bonds, Mello-Roos and fees that may be tacked onto a property tax bill, which is why it is so important to do your due diligence on a property before purchasing it. 

As of April 1, Prop 19 has been implemented into law. Through the passage of this proposition, seniors, wildfire/natural disaster victims, and citizens with disabilities will be able to move their property tax basis with them when they sell their current home and buy a new one. If they purchase a home of equal or lesser value than the one they sell, then they will be able to keep their old tax basis. For example, if an individual has owned a home for 30 years with a property tax basis of $300,000, and they sell the home for $800,000 and buy a new one for $800,000 or less, their property tax basis would remain $300,000.

If they buy a home greater in value, they will keep their old basis with an adjustment for the greater value. In the same situation, if the property taxable value is $300,000, they sell for $800,000, but buy a new home for $1,000,000, then their tax basis would be $300,000 + the difference between their sales price ($800,000) and the new purchase price ($1,000,000) which would be $200,000 = a new taxable value of $500,000.

We are seeing an uptick in seniors relocating across the state because of Prop 19. They now have the ability to sell their home in the big cities and move to more rural areas like the Central Coast for retirement. This change is going to create some opportunities for more inventory to come on the market. Several seniors are living on fixed incomes and have been unable to move because they do not want to pay property taxes based on today’s real estate prices, thus they have been locked into place. This will free up some of the housing stock, giving new home buyers an opportunity to purchase in established neighborhoods.

In order to get this tax benefit there was a tradeoff. Prop 19 also causes a reassessment of inherited property to current market value. Before this proposition was passed, there was a parent-child exclusion, where a parent could pass a property to their child and they would receive the same property tax basis from the time their parents purchased the property. This means that people who inherit property will have to pay more in property taxes. The property tax bill may quadruple or more, forcing the sale of inherited property. This will certainly put a damper on legacy properties and wealth building in California.

If you’d like to learn more about Prop 19, check out the link below.

Source: California State Board of Equalization Prop 19 Fact Sheet