California Proposition 19: More Questions than Answers.

California State Propositions always seem to be long on intent and short on implementation details, and Proposition 19 is no different. I can't recall a recent bill impacting real estate that has raised so many questions from home sellers, and many of the answers to these questions are still forthcoming. In fact, on the Prop 19 website, the State of California admits this by stating “Unfortunately, Proposition 19 did not have companion legislation that would have clarified a host of issues.” Hey, at least they're being honest about it.

In the first part of this two part post, I'll discuss some of the more basic questions that I've fielded regarding the Base Year Value Transfer portion of the bill, better known as the transfer-of-your-property-tax bill. Please bear in mind that you should always consult a qualified California tax attorney or CPA with specific questions regarding how Prop 19 may impact your specific situation.

Part I – Base Year Value Transfers.

The authors of Prop 19 clearly promoted this portion of the bill far more than any other provision, probably because it's the part of the bill where the “benefit” to the home seller is easier to sell. If you're a homeowner over 55 years of age, then you're undoubtedly familiar with both Propositions 60 and 90. Prop 6o was the bill that allowed homeowners 55 or older to transfer the protected property tax basis on their primary residence to a replacement property anywhere in San Mateo County. Prop 90 simply extended that reach to about a dozen “cooperating counties” throughout the state of California that would accept a transfer in property taxes from another county. Obviously, both of these propositions were incredibly important to homeowners whose property tax has been protected by Prop 13 for many decades.

The Base Year Value Transfer provision of Prop 19 is clearly intended to replace both of these propositions by attempting to broadening the scope that was intended in Props 60 and 90, while addressing some of the shortcomings. Here are some of the key points to the new proposition, and how it differs from before:

1. All of California. One of the shortcomings of Prop 90 was that it was limited to counties that voluntarily participated in the program. At its peak, it was only about 12 counties, and that list seemed to be constantly changing as some counties dropped out while others joined. Prop 19 corrects that shortcoming by essentially mandating every county in California to participate. Now you can move anywhere in California and transfer your tax basis to a qualified property.
2. Three Transfers. Under the old law, you could only transfer your property tax basis once after you turned 55. Under Prop 19, it can be done three times for qualifying properties.
3. Any Property. Prop 19 applies to any replacement home in California, regardless if it is more or less expensive than the original home. Under the old law, you could only transfer the tax basis if the replacement home was of the same or lesser value than your original property. Now bear in mind that nothing comes for free — when you apply your existing tax basis to a more expensive home, your basis is increased to accommodate the more expensive property. Here's an example of how it's calculated, taken from the CA Board of Equalization site:
   • “For example, an original home was sold and had a full cash value of $400,000 and a factored base year value of $100,000 at time of sale. If a replacement home is purchased for a full cash value of $600,000, the difference of $200,000 ($600,000 – $400,000) is added to the factored base year value of $100,000. Thus, the replacement home will have a new base year value of $300,000 ($100,000 + $200,000).“
4. Timing. This is the area where most of the questions arise, since it had the least amount of detail when the bill was written. According to the BOE website, April 1 2021 is “operative” date for base value transfers. What does that mean? Do sellers have to wait until after April 1 to sell their home? Thankfully, the answer to that is no. As long as one of the two properties (either your existing home or your replacement home) closes on or after April 1, then it qualifies. So in theory, you can sell and close your existing home now, but you cannot close escrow on the replacement property until after April 1 and still transfer your tax basis. Conversely, you can purchase and close on your replacement home now, but you can't sell and close your existing home before April 1. In other words, if you complete both transactions before April 1, you will likely not be able to transfer your basis. Here's what the BOE says about this:
   • “Proposition 19 requires the transfer of the base year value to occur on or after April 1, 2021. It does not require that both the primary residence be sold and the replacement primary residence be purchased on or after April 1, 2021. Therefore, in most cases, as long as either the primary residence is sold or the replacement primary residence is purchased on or after April 1, 2021, the base year value of the primary residence can be transferred to the replacement primary residence under Proposition 19. However, future legislation may impact the operation of Proposition 19 and any updates will be posted on the Board’s website.”

The best resource for deciphering Proposition 19 is at this page on California Board of Equalization website. Within that page, there's a very good FAQ section where I pulled the above examples from. Again, if you have any specific questions about how Prop 19 may impact you, please consult a qualified California Real Estate Attorney or CPA.

In the next post on this topic, we'll touch on the more sticky and confusing topic of Parent-Child and Grandparent-Child transfers. Remember when I mentioned above that nothing comes for free? This portion of the Proposition is where the state gets their hands a little deeper in your pocket.