The Good and the Bad of Proposition 19.

Property Tax 101.

As home prices continue to escalate in San Carlos and throughout the Bay Area, property taxes are becoming a more prominent expense in home ownership. Unlike a fixed mortgage, where the payment remains the same every month for the duration of the loan — regardless of whether the value of your home increases or decreases — property taxes are tied to the assessed value of your home. So, as the value of your home increases, so do your property taxes.

I jokingly refer to property tax as “the gift that keeps on taking” because even when you no longer have a mortgage payment, you'll still be paying property taxes.

In 1978, California passed Proposition 13 to combat runaway property tax bills. Three major provisions of Prop 13 still impact homeowners today, almost fifty years later:

• It caps the property tax rate at 1% of the assessed value.
• Limits the annual increase in assessed value to a maximum of 2%.
• Reassesses properties to the current market value only upon a change of ownership or new construction. 

How does that impact homeowners today? Most notably, people who have stayed in the same homes for many years are paying significantly lower property taxes than someone who recently purchased a very similar-sized home. That's because the value of these older homes rose much more quickly than 2% annual cap on assessment each year, thus creating this notable gap. The irony is that the “burden” on the municipalities is the same for both houses, yet the property taxes being paid are so drastically different.

One of the disclosures I am required to provide as a Realtor when I am listing a home is the Preliminary Title Report. One of the main details in this report is the property taxes that the current owner is paying. When I'm fortunate enough to sell a home that has been in someone's family for many decades, it still amazes me to see annual property tax liabilities that are only a few thousand dollars.

It's even more amazing to know that the property tax bill for that very same house will jump by at least five times the minute the property changes hands.

An Impediment to Moving.

One of the unintended effects of Proposition 13 was that it created a barrier for longtime homeowners who wanted to relocate, because they would be forfeiting the very favorable property tax rate they've enjoyed for years, and would now be saddled with a bill that's at least 1% of their new home. Even if they were downsizing, the difference in the tax bills was significant enough to dissuade the move.

The net result is that many older homeowners on fixed incomes are opting to stay put, and that just adds to the shortage of homes that are available for sale. (There is a similar effect happening right now with Covid-era mortgage rates that are keeping people from moving, but that's a story for another day).

To combat this problem, the state passed Propositions 60 and 90 back in 1988. The two propositions were very similar in that they allowed homeowners to transfer their base year value (the original assessed value) of their current home to a new one. There were a few restrictions that applied to both laws

• The sellers must be 55 years or older to qualify
• The original and replacement properties must be the principal residences. It does not apply to investment properties.
• The replacement home's value must be equal to or less than the original home's sale price.
• The original residence must be sold within two years of the purchase of the replacement property.

The main difference between the two initiatives is that Proposition 60 applied to transfers within the same county, while Proposition 90 extended the same benefits across the state, but only between “cooperating counties”.

On the surface, this appeared to be a win for longtime homeowners, but there was one major problem: The number of cooperating counties in the entire state only numbered about 12-14 at any given time, and they were constantly changing. So while a few homeowners were able to take advantage of the tax break, it really didn't move the needle.

Enter Proposition 19.

In 2020, Proposition 19 was put on the ballot with the intent of superseding both Propositions 60 and 90 by improving the ability of long-time homeowners to transfer the property tax base anywhere in California, among other provisions in the bill. It barely squeaked by in the November election by a 51/49 margin.

Today, there are some voters who probably now wish the ballot measure had failed, because, along with some good intentions with the bill, there are some issues that are causing homeowners major heartburn. Here's a quick snapshot of the good and the bad of Proposition 19:

The Good.

Proposition 19 set out to remediate the one glaring problem with Propositions 60 and 90 — namely, that there were not nearly enough cooperating counties in California to move the needle for longtime homeowners. It solved that problem by requiring that every county in California be a “cooperating county.” The benefits to homesellers are:

• The same sellers who qualified under Props 60 and 90 (over 55, primary residence), can now move their tax basis anywhere in California.
• They are not restricted to just “buying down”. Under Prop 19, they can also purchase a more expensive home and still enjoy the benefit of transferring their basis. Only the difference between the sales price of the existing home and the purchase price of the new home is assessed at the current value. For example, if a person sells their home for $1,000,000 and purchases another home for $1,500,000, they get to preserve their old tax basis for the first $1M, and the remaining $500K is assessed at the current property tax rate.

Sounds good, right? Indeed, making the playing field level across the state would appear to be a huge win for longtime homeowners. But you have to remember that governments aren't in the business of giving money away, so there was another provision tucked into Proposition 19 that is causing many families some unintended heartburn.

The Bad.

The second, and much less discussed, provision of Proposition 19 was the severe roll-back of the inter-family tax basis transfer. Before Prop 19, if a property transferred within the same family (from parent to child or grandchild), the tax basis was preserved. Now, that benefit has been largely eliminated.

• The child or grandchild receiving the property can only enjoy the old tax basis if the home will be their principal residence. The minute it is used as a rental, the property tax increases up to the current assessed value. Second homes and investment properties are no longer eligible for the tax exclusion, either.
• The recipient is allowed to exclude just the existing factored base year value (taxable value) of the home, plus an additional amount (initially $1 million). Any amount that the home is valued above this mark is now taxed at the current rate.

It doesn't take a genius to see how this change could negatively impact the person receiving the home. If they can't claim the transferred property as their principal residence, it gets reassessed at its current value, and the child is suddenly saddled with a significant and unexpected property tax bill every year.

Even worse, if the child inherits multiple properties from his or her parents, only one of those would be eligible for the exclusion, so the problem essentially multiplies.

This article in the Mercury News highlights a couple of homeowners who are likely going to have to sell their inherited properties rather than keep them, simply because they cannot afford the adjusted property tax bill.

What Happens Next?

There have been two previous attempts to repeal the aforementioned inheritance portion of Proposition 19, and both failed to get enough traction. Not to be deterred, Prop 19 detractors are gunning for a third repeal campaign before the November 2026 election.

Don't be surprised if that propaganda doesn't start to ratchet back up in the coming months.

(Author's note: I am not an expert in finances or taxation. This article is a very high-level discussion about property taxes, and there are many more details in each of the various tax initiatives. You should consult your qualified CPA or tax attorney with any questions you have on this topic).