Two key components:
1: Seniors can now transfer their tax basis up to three times anywhere in the state
Now, older homeowners (55+) can take their old property-tax basis with them when they buy a more expensive home anywhere in the state — up to three times. Homeowners with disabilities will be able to do the same, plus victims of wildfires and other natural disasters and hazardous waste contamination will be able to do so after their home is damaged.
2: $1M inheritance tax exemption for rentals is gone
In California, parents or grandparents could transfer primary residential properties to their children (or grandchildren if all parents are deceased) without the property’s tax assessment resetting to market value. Other types of properties, such as vacation homes and business properties, could also be transferred from parent to child or grandparent to grandchild with the first $1 million exempt from re-assessment when transferred. The ballot measure eliminates the parent-to-child and grandparent-to-grandchild exemption in cases where the child or grandchild does not use the inherited property as their principal residence, such as using a property as a rental house or a second home.
I don’t think it means much. The main reason not to move is to avoid capital gains taxes. For many long time owners with gains over $500k the capital gains tax makes it too expensive to move even to a house of lesser value. Let’s say you have a $2m house that you paid $200k for. The CA and Fed cap gains tax on the $1.3m taxable gain is about 25%. $330k. The extra $10k a year in property taxes seems minor compared to that. Then you have to have an extra $330k just to buy the same cost house.
I was surprised that it passed. I thought only realtors supported it. A few low end homes under $800k might sell but it won’t open up the BA or any coastal city with a bunch of new listings.
People need money to retire. What’s the point of sitting on a million dollar’s worth of untapped house appreciation after retirement? Passing it on to the brats who don’t even call?
Many folks will find it appealing to sell their expensive house in the BA, buy in a lower cost locale and fund their retirement with the capital gain.
They can get reverse mortgages and stay in their homes. I think most retirees will stay where their families and friends are. In the old days there was no cap gains taxes on private homes as long as you traded up. That would have been a greater incentive to sell than prop 19
I think most people fear reverse mortgages. They think of them as a way for people to take your home from you.
Less fearsome than the government taking 25% of your equity. But there are plenty taking their BA equity and moving. You and me included. There are investment strategies to avoid some or all of the tax. But prop19 offers little incentive to move. Most people people that leave have much more pressing reasons than property tax.
I was looking forward to handing a few houses down to the kids so that they could remain in the area and be grandfathered into low property taxes. Sigh…better do well in school or they may have to move to Texas…
Long term cap gains tax doesn’t keep people from selling their stocks if they have a compelling reason. And of course if they used an IRA or 401k as their primary savings vehicle all the withdrawals are taxed as ordinary income. Moving is a big deal; I wouldn’t think losing 25% of the equity most people can’t really do anything with anyway would be a big factor.
Reverse mortgage is probably a terrible idea. Much better do a clean and simple sale.
If the child uses the inherited rental property as principal residence, then would $1M exempt from re-assessment be applicable?
The 1M exemption would apply in that case it seems.
The new changes to property transfers among family are set to begin on Feb. 16, 2021. Property tax transfers for the elderly, disabled and natural disaster victims will apply starting April 1, 2021.
There’s still not clarity if the $1M exemption is kept if the parents/grandparents owned the property as a rental property and the kids/grandkids will move in as primary house. This article makes it seem it won’t work: The harms of Prop. 19 will soon be clear – Orange County Register
I have trouble deciding from the text itself: Codes Display Text
This part “Subject to subparagraph (B), in order to receive the property tax benefit provided by this section for the purchase or transfer of a family home, the transferee shall claim the homeowner’s exemption or disabled veteran’s exemption at the time of the purchase or transfer of the family home.” makes it seem that receiving the homeowner’s exemption is sufficient.
Also, it appears you only need to receive the homeowner’s exemption for one year and then you could move out and use the property as a rental.
If you are going to let your child inherit the property, can you give it to them right now? Or does the transfer have to wait until after your die?
Wouldn’t you have to give it to them $15000 at a time (or $30K - $15K from each parent) so as not to set off the gift tax?
Can’t you still put the houses into a trust and let the kids live in them?
Is it so? Didn’t look into it. Is there some trust kung-fu you can do to transfer ownership, not trigger gift tax limitation, and yet beat the Prop 19 deadline?
To transfer with out tax you need to setup partnerships like a business
I know someone who lives in a house which was put in a trust. I can ask him next year if he was affected. I don’t know how much of this is retroactive.
My parents house was in a trust. We still had to pay inheritance tax. Back when only $650k was sheltered. A trust doesn’t help avoid taxes.