Proposition 19 California Increases Property Taxes on Inherited Homes
Image credit: Reason Foundation
By the slightest of margins, Californians approved Proposition 19 on Election Day. This creates two provisions: (i) new property tax breaks for older homeowners; and (ii) property tax increases for those inheriting their parents’ or grandparents’ properties.
The second item is rather significant for about 650,000 Californians who have received a tax break since 2011 that’s allowed them to keep their relatives’ low property taxes when they inherit the home. However, Proposition 19 now makes heirs pay the market value in taxes.
Proposition 19 received 51% of the more than 15.3 million votes cast. It’s a victory for the California Association of Realtors, which made major changes to a similar 2018 initiative that voters rejected by 20%.
Details for the Proposition 19 Initiative
Homeowners age 55+ or who’ve lost a home in a natural disaster and may have been concerned to move out because of higher property taxes can now transfer their tax assessment to a more expensive home three times (rather than the single allowance previously on the books). Older homeowners in California had just a one-time opportunity to retain their existing tax benefits if they moved to a home of equal or lesser value within the same county. They also could do this between Los Angeles and nine other counties. If they failed to satisfy the requirements or moved to a more expensive home, they’d be subject to the full amount in property taxes.
The new Proposition 19 exemption may trigger increased home sales. It could encourage people who were hesitant to sell because their tax bills would rise sharply. Now empty-nesters can move to a new home without a large tax bill. The same goes for those wanting to move for health reasons.
Blended Taxable Value
These older Californians will be able to blend the taxable value of their existing home with the value of a new, more expensive home they purchase. This will mean potential property tax savings of several thousands of dollars a year.
Proposition 19 also wipes out an exemption used when someone transfers a house to a child or a grandchild. The initiative states that if the child or grandchild doesn’t reside in the inherited house, the tax value will be reassessed at market value. Thus, children who inherit their parents’ houses who plan to use the property for rental income or keep it as a second home will no longer receive a property tax break. A 2018 Los Angeles Times investigation revealed that owners have used a large number of inherited homes along the coast as investment properties.
Supporters of Proposition 19 raised nearly $64 million. All but about $5 million came from the California Association of Realtors and the National Association of Realtors. Opponents raised less than $50,000.
Other Tax Benefits Part of Proposition 19
Proposition 19 also provides tax benefits to severely disabled residents and homeowners who have had their property ruined by a natural disaster or other catastrophe.
“Voters passed Proposition 19 because it is a win-win for California, providing needed housing and tax relief for seniors, wildfire victims, and generating much needed revenue for schools, fire districts, cities and counties as they face budget shortfalls due to the harmful economic impact of COVID-19,” said Jeanne Radsick, president of the California Assn. of Realtors.
In 1978, California enacted legislation designed to keep property taxes low. The state’s voters passed Proposition 13 in 1978 to cap property taxes on properties at 1% of the sales price and the property taxes can only increase a maximum of 2% per year. Thus, California property owners are paying property taxes based on the price that they originally paid for the property. That price is typically much less than what it is actually valued at today. As a result, if a home’s value increases significantly, the property tax can only go up 2% a year. For older California as they age, this becomes an even better idea with the rise in California property values.
However, without Proposition 19, seniors did not want to move from their homes. They would be paying higher taxes if they purchased a new house.