California’s Prop 19: Who Wins & Who Loses
Who doesn’t love talking about taxes? If you don’t, move along. BUT if you own property in California, you might wanna stick around. Prop 19 might’ve been the BEST thing to happen to your tax bill—or the WORST. 🤷🏻♀️ It really all depends on your circumstances. Either way, it changed how your tax basis is handled come time to transfer, and the new-ish rules are still catching people off guard.
First off, what’s tax basis? What’s Prop. 13? And what does all of this mean?
You buy your home at a certain price, and that typically becomes the tax basis. (There are circumstances where it doesn’t. We’ll talk about those another time.) Property values can increase rapidly, which means your tax bill would, too, but you’re protected from also paying rapidly increasing annual property taxes thanks to Prop 13, which passed in 1978.
Before Prop 13, property taxes in California were based on a home’s current market value, which meant taxes could skyrocket as home values increased—even if you weren’t selling. It was a nightmare for long-time homeowners, especially retirees, who found themselves priced out of their own homes by rising property taxes.
Prop 13 changed the game. It set property taxes at 1% of the home’s purchase price and capped annual increases at 2% per year, no matter how much the home’s market value jumped.
That’s why someone who bought a home in, say, 1980 for $100,000 could still be paying taxes on a value of $200,000 today—even if the home is now worth $2 million. This locked-in tax base became a huge financial advantage for long-time homeowners and their heirs… until Prop 19 came along and rewrote the inheritance rules.
Prop 19 enters the scene…
So what ARE the new rules, you ask? We, if you’re 55+, disabled, or a wildfire victim, you can take your tax rate with you. Before Prop 19, this was a logistical nightmare. You could only transfer your tax base once, your new home had to be equal or lesser value, and only certain counties even allowed it. But Prop. 19 changed all of that. Which is good new for you!
• You can transfer your tax base anywhere in California—no county restrictions!
• You can buy a more expensive home and still get tax savings (though you’ll pay the difference).
• You can do this up to three times in your lifetime (before, you only got one shot).
• If your home was destroyed in a wildfire or natural disaster, you get unlimited transfers.
Basically, downsizing doesn’t come with a financial punishment anymore.
What about inheritance? Will my wallet stand a chance?
I have bad news. If you inherit a property, there’s a chance you might need to sell. For decades, families could inherit property without a tax increase, keeping that sweet, low property tax rate locked in, and here’s where things really changed. The concept of passing on multi-generational wealth is no longer a guarantee of security for the heirs, because now, if you inherit a home and don’t live in it as your primary residence (you have a year to make it your home sweet), the county reassesses it at today’s market value. That means your tax bill could jump by thousands, tens of thousands or more. If you’re in San Francisco, the median property price is somewhere around the $1.4M mark. Only the first $1M of the property’s fair market value is protected at the old rate. The difference between market value and the protected $1M will be taxed at the standard 1% tax rate. For instance, if it’s value is $1.4M, $400K will be taxed at $1%. If it’s a rental or vacation home? Brace yourself—because you’ll be paying full freight.
So what’s next for you?
If you have plans to move and fall into a category where you can take your tax basis with you, let’s talk. If you have inherited a property and need help exploring your options, let’s talk. If you want to know how Prop 19 affects your plans, let’s talk. California real estate is ALWAYS shifting, and this is just one of the latest twists. But no matter what happens, I’m always here for your real estate needs and I’ll help you figure out your next movem so let’s talk. 🙂
