During the 2020 election, a ballot measure for Proposition 19 was being voted on in California. In short, what this measure proposed is that, if approved, it would give tax breaks to older homeowners and would affect how inherited properties are taxed. In a close election, the measure passed with a 51% majority vote and will go into effect in 2021. The changes to inherited property taxes will apply beginning on February 16, 2021, and the changes to property tax transfers for older homeowners goes into effect April 1, 2021.
Whether you’re a homeowner currently or are thinking about buying or selling a home in San Diego, you should be aware of the key changes that will be in place next year as a result of Prop 19. Here are the benefits of California’s Proposition 19 and everything you need to know about how it changes the law surrounding real estate ownership and tax implications.
New tax benefits for older homeowners, natural disaster victims, and/or people who are severely disabled
When Prop 19 goes into effect, people who are 55 and older as well as victims of natural disasters and the severely disabled will be able to transfer their current tax base to a new property of equal or lesser value than their current property. If they’re purchasing and moving to a house of greater value, this group of homeowners will be allowed to blend the taxable value of the new property with their current one.
What this means for the homeowners who fall into this group (55+, disaster victims, or disabled), is that they will likely save thousands of dollars in annual taxes if they decide to move. The way it works is that homeowners are currently paying property taxes at an approximate rate of 1% of the home’s taxable value at the time it was purchased. While homes appreciate in value over time, the property tax rate stays the same. Before Prop 19, if they decided to move, they would then have to pay the 1% property tax of the new home, which is likely much more expensive than their previous home was at the time of its purchase.
After Prop 19, if these homeowners decide to move, they are allowed to keep the same low property tax rate based on their original home’s taxable value the year it was purchased rather than basing it off of the new home’s current taxable value. This applies if the home they are moving to is of equal or lesser value — in the case that they are moving to a more expensive home, the property tax rate is blended between the two properties which is still much lower than it would have been before Prop 19.
What does this mean for you? If you fall into the category of being a homeowner who is 1) 55 or older, 2) a victim of a natural disaster, and/or 3) someone with severe disabilities, then you can receive tax breaks if you move starting in April 2021. You can buy a new home, up to three times total, and move while keeping your initial tax base and transferring it to a new property.
Now’s the best time to start looking into selling and looking for your new dream home. I can help you through this process and find the perfect home that suits your current lifestyle.
Inherited property tax rate changes
In addition to the tax breaks for older homeowners, Prop 19 also affects how inherited properties are taxed. Currently, when a parent passes on a property to a child and the child uses it as a second home to rent out rather than as their primary residence, the property tax rate remains what it was for the parent. When Prop 19 goes into effect, the tax break will go away and the person who inherits the property will pay taxes based on the current market value.
This change only applies to additional, secondary properties rather than their primary residence. So, if a child inherits a home from a parent, and then they move into that house, there are still tax breaks and Prop 19 doesn’t affect it. However, if the child uses the inherited home as additional income by renting it out, they will now pay taxes at the higher, current assessed market value rate.
What does this mean for you? If you are expecting to inherit a second (or more) property from your parents, you will likely pay a much higher property tax rate starting next year than what your parent is currently paying. You may want to consider looking into potential options for selling and making a plan ahead of time in order to maximize growing your wealth.
If you have questions about the changes to Prop 19 and the real estate implications, or if you’re considering your options for buying and/or selling a home in San Diego, give me a call and let’s work together.