Transferring Property Tax Basis in California After Proposition 19

Questions about real estate taxes, from people who are not real estate investors, usually are about property taxes not income taxes. To a commercial real estate investor, “transferring basis” generally means transferring their income tax basis through transactions like 1031 exchanges.  But to folks who aren’t real estate investors, but who might own their home or a rental property, “transferring basis” usually refers to transferring their property tax basis, i.e., avoiding reassessment.

Most questions these days are with regard to the effects of Proposition 19, which went into effect in 2021, and significantly changed the rules for reassessment for certain transfers.  In recognition of Prop 19’s five-year anniversary, let’s review its effects on the reassessment landscape.

To set the scene, in 1978 California voters passed Proposition 13 and it dramatically changed the way real property was assessed for property taxes.  Generally, it meant that reassessment to fair market value would occur only upon the transfer of the property, and until the property was transferred the assessed value could only be increased annually by a marginal amount, capped at 2%.  Understandably, the fair market value of California property has generally far outpaced its assessed value.

The prior law provided exceptions to the general rule of reassessment upon transfer. A parent could transfer their principal residence, of any value, to their children (or grandchildren if both parents were deceased) without triggering reassessment.  Additionally, up to $1,000,000 of other real property could be transferred to children or grandchildren without triggering reassessment.

In 2020 California voters passed Proposition 19, which made significant changes to the ability of parents to transfer property without triggering reassessment, and the ability to transfer the property tax basis of one property to another replacement property. Proposition 19 was beneficial to some taxpayers (senior citizens, disabled persons, and disaster victims), but placed restrictions on the reassessment exclusions for other taxpayers (parents and grandparents transferring to their children and grandchildren).

Transfers to Children and Grandchildren

As of February 16, 2021, Proposition 19 repealed the prior law exclusions from reassessment for transfers to children or grandchildren described above.  The exclusion from reassessment now applies only to the “family home” (principal residence) or the “family farm” (real property used for agricultural, pasture, or grazing), and not to any additional “other property.”  Further limitations include the following:

• The exclusion applies only if the property being transferred has a fair market value not greater than its current assessed value, plus $1,000,000. To the extent the fair market value of the transferred property exceeds that amount, the amount of the excess will be added to the transferred property tax basis.
• Example: If a parent’s home has an assessed value of $300,000 and a fair market value of $1,500,000 at the time of transfer, the exclusion allows the transferee to exclude $1,300,000 ($300,000 + $1,000,000).  The excess of $200,000 in the property’s value is added to the transferor’s property tax basis, for a new assessed value of $500,000 for the transferee.  If, on the other hand, the transferred home was worth $1,200,000, then the transferee’s new property tax basis would be $300,000.
• The transferee child or grandchild (if both parents are deceased) must move into the transferred property within one (1) year after transfer, and continue to use it as their principal residence. If the transferee child or grandchild ceases to use the property as their principal residence, the assessed value will be increased to the amount that it would be if the property had been reassessed at fair market value at the time of the transfer, and had been adjusted for inflation thereafter.
• Eligible transferors and transferees are limited to individuals, i.e., transfers by entities (such as corporations, LLCs, or partnerships) are not eligible for the exclusion. A “transfer” includes the transfer of the present beneficial ownership of property through the medium of an inter vivos or testamentary trust.
• To take advantage of the exclusion the transferee must: (i) file for the homeowners’ or disabled veterans’ exemption within one year of the transfer, and (ii) file a claim for the exclusion with the county assessor before the earlier of three years after the transfer, or transferring the property to a third party.

Assessed Value Transfers by Seniors, Disabled Persons, and Disaster Victims

Under the prior law, homeowners that were age 55 or older, or severely disabled, could transfer their property tax basis to a replacement home of equal or lesser value located in the same county, or to certain counties that accepted intercounty transfers.  Homeowners could transfer their property tax basis only one time.

Under Proposition 19, homeowners that are age 55 or older, or severely disabled, or victims of wildfires or natural disasters, can transfer their property tax basis to a replacement principal residence located anywhere in California.

• “Eligible homeowners” includes only individuals, and not entities such as corporations, LLCs, or partnerships. Eligible homeowners can transfer their property tax basis up to three times.
• If the replacement home is of equal or lesser value, the property tax basis transfers directly. If the replacement home is of greater value, the difference in value is added to the transferred assessed value.
• Example. If an eligible homeowner sells a home with an assessed value of $225,000 and a market value of $700,000, and buys a replacement home for $800,000, the new assessed value will be $325,000 ($225,000 plus the $100,000 excess value).
• The replacement home must be purchased or newly constructed within two years of the sale of the original home.
• A claim must be filed within three years of the purchase or completion of the replacement home. Late claims are allowed, but only for prospective relief.

The Bottom Line

Proposition 19 made some significant changes to the reassessment landscape.  It placed significant restrictions on the exclusion from reassessment for transfers between parents and children.  But it added significant benefits to the ability of senior citizens, the severely disabled, and victims of natural disasters to transfer their property tax basis from one residence to another residence.