Unlocking Proposition 19: Key Insights for Homebuyers and Sellers

Proposition 19, a pivotal legislation passed in November 2020, introduces crucial provisions that demand attention from both prospective homebuyers and sellers contemplating a move. Let’s delve into the fundamental aspects of this significant proposition.

How Proposition 19 Alters Tax Basis Portability Rules

Proposition 19 brings about noteworthy changes, particularly in the realm of tax basis portability. This proposition extends the opportunity for homeowners aged 55 or older, those facing severe disabilities, or those whose homes have suffered substantial damage from wildfires or natural disasters. They can now transfer the taxable value of their primary residence under the following conditions:

a) To a replacement primary residence anywhere in the state.
b) Regardless of the value of the replacement primary residence (with adjustments for properties of greater value).
c) Within two years of the sale.
d) Up to three times, especially for those whose homes were destroyed by fire.

Contrasting with the previous rule (Prop 60 and Prop 90), which limited the exemption to a one-time transfer within the same county or between specific counties and only if the replacement property was of “equal or lesser value.”

Impact on Tax Basis When the Replacement Property Value Matches or Is Lesser

In cases where the replacement property is of equal or lesser value, the tax basis of the replacement property remains unchanged. The taxable value seamlessly transfers from the original property to the new one.

Calculating New Taxable Value for Replacement Properties of Greater Value

If the replacement property holds a greater value, the new taxable value is determined by adding the difference between the full value of the original primary residence and the full value of the replacement primary residence to the taxable value of the original primary residence. For example, if a property with a $300,000 taxable value is sold for $1M and a replacement property is purchased for $1.5M, the taxable value of the replacement property would be $800,000. [($1.5M – $1M) + $300,000]

Timing of Replacement Property Purchase

Proposition 19 aligns with the current rule under Prop 60, allowing the purchase of a replacement property before the sale of the original primary residence.

Implications for Intergenerational Transfers

For intergenerational transfers to children or grandchildren, Proposition 19 specifies that the exemption is limited to properties where the primary residence continues to be used as a family home by the transferee. The taxable value remains the same unless the property value, at the time of transfer, exceeds $1M over the original tax basis, triggering upward adjustments.

Reassessing Tax Basis for Inherited Properties Not Used as Primary Residence

If a child inherits a family property but opts not to use it as their primary residence, the property’s tax basis will be reassessed. The new taxable basis is the assessed value of the property at the time of transfer minus $1M.

Claiming Tax Basis Transfer

Claims to transfer a tax basis can be made using forms provided by the local county assessor’s office. Understanding these intricacies is crucial for navigating the real estate landscape under Proposition 19.