A New Property Tax Setup for California Homeowners

Proposition 19 in California brought forth a new rule in 2021 on property tax reassessments when deeds are transferred. Here, we take a look at how California homeowners will be impacted.

Property Taxes: Capped in California

Thanks to an existing ballot measure, Proposition 13, property taxes can only go up 2% a year. Home values have risen briskly in California in recent years, so the cap is saving established residents a good deal of money on taxes.

There’s a downside to this, of course. Longtime homeowners are getting a tax edge on first-time buyers.

What’s more, in the interest of keeping their taxes capped, people might stay in one place beyond the point when they might otherwise put their homes back on the market. These owners might delay moving closer to relatives, or nearer to health and recreation amenities that could improve their quality of life. After enjoying low taxes for years, they’ll find taxation on the full market value of a future home hard to swallow.

Now, Proposition 19 modifies this provision.

Proposition 19 Lets Certain Homeowners Move — Keeping Their Low Property Taxes

Proposition 19 is titled the Home Protection for Seniors, Severely Disabled, Families and Victims of Wildfire or Natural Disasters Act. Under Prop. 19, certain homeowners can keep their lower property taxes when they sell and move to a new home anywhere in California. Since Apr, 1. 2021, the Prop. 13 tax basis (see the section above) is portable for eligible homeowners.

People in one or more of three categories are now eligible to take their low taxes with them when they move:

• Homeowners aged 55+ (as per these instructions).

• Homeowners who live with a severe and permanent disability, based on a certificate of disability from a licensed surgeon or physician (as per these instructions).

• Survivors of state-declared disasters or wildfire damage (as per these instructions).

These reassessment exemptions are allowed up to three times in a homeowner’s lifetime (or once per fire/disaster).

When any of these homeowners buy a home at a price up to the value of the one they’re selling, the tax will not change, despite the move. If the new home is valued at a higher price than the sold home, the owner does face an additional tax charge — but just for the difference in price. In other words, the eligible homeowner gets a hybrid tax rate when selling the current home and buying a costlier home. This is a typical situation as California home prices have risen so much lately. 

☛ California homes are in high demand. Home prices in many California cities have climbed more than 20 percent in just one year. Here’s what’s keeping the market hot.

Intergenerational Transfers? Some Heirs Will Lose Their Tax Breaks

Prop. 19 has another effect, too. While it gives some house-to-house movers a break with one hand, it removes a benefit from heirs with the other hand.

Now, the low Prop. 13 tax basis can’t be inherited by the next generation, whether the property passes by will or through a family trust. The lower tax basis may not transfer over by sales or gifts of real estate within families, either. Since February 2021, real estate transferred within families constitutes a legal “change in ownership” and gets reassessed to its full market value by the local property tax assessor.

This goes for investor-owners’ properties, too. Even if the owners’ adult children want to move into their parents’ investment property, their inherited real estate will get a full-market-value assessment when the deed changes hands.

We note, though, that California families of modest means can continue to get a break on their property taxes. If a parents’ primary residence goes to adult children, and at least one of them moves into the home within a year of the conveyance, no reassessment occurs — as long as the home isn’t worth more than a million dollars. For homes valued above $1,000,000, the heirs receive only partial relief.

Heirs wishing to move into the house and keep their parent’s lower property tax should file the Claim for Reassessment Exclusion for a Transfer between Parent and Child.

What if the current homeowners are joint tenants with rights of survivorship? When one co-owner dies, a joint tenant with survivorship rights (a surviving owner with 100% ownership rights) can receive the real property without a property tax reassessment. The surviving joint owner should file the Affidavit of Cotenant Residency.

There are other circumstances under which co-owners can convey deeds to each other without triggering a legal change of ownership and a property tax reassessment. For example, joint tenants may convey a deed to themselves as 50/50 tenants in common.

☛ When two or more people own a home, how does their title vest their ownership? How co-owners vest their property matters as much as a will or trust.

Heirs Will Still Get a Stepped-Up Tax Basis for Federal Capital Gains Tax Purposes

On the federal tax score, heirs still receive a major benefit. The stepped-up cost basis lets the heir pay capital gains tax only on the home value since the deceased owner passed away — not on any rise in value during that deceased owner’s lifetime. This can reduce federal taxes significantly.

So, if you own a home and its value rises over the years, your heirs needn’t worry about your capital gains tax after you pass away. (This advantage applies only when owners bequeath the home to heirs — not when they give the home away or sell it.)

If federal tax law changes, and the stepped-up tax basis is taken out of play for people inheriting homes, many families that have built up equity over the years will face higher tax burdens. Therefore, homeowners took notice when the Biden administration declared an interest in overturning the stepped-up basis.

The end of the step-up could affect households of all income levels. In California, this would mean many heirs would be dealing with two separate increases in home-related taxes. At this time, we do not expect this to occur, but the possibility is on our radar.

Looking Ahead

The recent changes to California’s property tax provisions will draw more revenue for some local governments and schools. The bulk of the new tax revenue is to go to counties and agencies tasked with California wildfire mitigation. California Professional Firefighters are among Prop. 19’s backers.

Yet Prop. 19 isn’t overwhelmingly supported by Californians. It squeaked by with a 51% “yes” vote. Nonprofit organizations were divided over it. Thus, it’s quite possible that California’s 2021 tax changes will undergo future tweaking.

As always, note that each situation calls for professional counsel related to its specific fact set, as well as the potential for new changes in state laws. Please consult with a real estate attorney admitted to the California Bar for legal advice, or with your tax expert for tax planning guidance under California law, the Internal Revenue Code, or both. This article is intended as a general update and commentary related to deed conveyance — but not as professional tax or legal advice.

Supporting References

California Revenue and Taxation Code § 60: Change in Ownership.

California Code of Regulations § 462: Change in Ownership Rules for Tenants in Common and for Joint Tenants.

Los Angeles County Assessor: General Info — Proposition 19.

California State Board of Equalization: Proposition 19: Frequently Asked Questions (2021).

Official Title and Summary Prepared by the Attorney General: Proposition 19 Changes Certain Property Tax Rules: Legislative Constitutional Amendment (PDF).

Ballotpedia: California Proposition 19 — Property Tax Transfers, Exemptions, and Revenue for Wildfire Agencies and Counties Amendment (2020).

Leslie Sargent Eskildsen for the Orange County Register: New Prop. 19 Property Tax Measure Can Save You Money (Jul. 29, 2021).

Editorial Summary by Atty. Devin Lucas, Lucas Real Estate: Navigating New California Proposition 19: Its Dramatic Property Tax Increase on Inherited Property (Aug. 16, 2021).

Deeds.com: The 1031 Exchange and Other Real Estate Tax Staples: Will the Biden Administration Make Changes? (Jul. 1, 2021).

Photo credits: Vital Sinkevich and Matthew LeJune, via Unsplash.