If you are over 55 years old, downsizing or upsizing you primary home is now easier than ever. Compass’s legal counsel, Sam Kraemer explained how newly passed Proposition 19 works as follows.
“The main provision of Prop 19 allows the owner of a primary residence who is 55 years of age or older to transfer the taxable value (its tax basis) of that residence to a replacement primary residence anywhere in the state. In other words, if I sell my home of 30 years, with a taxable value of $100,000, and buy a new primary residence in California, I will be able to keep the benefit of that basis at my new home.
In truth, Prop 19 actually allows for the easier movement of a primary residence’s taxable value. As you will recall, the old law only allowed a basis to be moved between two counties if those counties opted in to the law. Prop 19 on the other hand, allows for that movement “anywhere in this state.” Additionally, contrary to prior law, Prop 19 allows a primary residence’s tax value to be moved three times as opposed to only once. So, for a client over 55 years old, it is easier to move and keep the tax benefit of their original home.
With regard to the actual tax implications of the Proposition, the law provides that if the taxable value of a home is transferred to a replacement that is “of equal or lesser value,” then the taxable value of the replacement primary residence will be the same as the taxable value of the original. In other words, the basis of my original home gets transferred exactly to my new home. On the other hand, if I transfer my basis to a replacement property that is of greater value, then the basis for my new home is calculated as follows: the taxable value (basis) of my original primary residence is increased by the difference between the cash value (sales price) of my original residence and the cash value (purchase price) of my replacement residence, and that new number becomes the replacement home’s basis. As an example, if my present, original residence has a tax value of $100,000, but a cash value of $500,000, and I buy a replacement primary residence for $1 million, then the tax value (basis) for the new home will be $600,000 (the original tax value ($100,000) plus the difference in cash value between the two properties ($1 million minus $500,000)). Again, even though there is a step up in basis that recognizes the increased value of my new home, it is still kept down by using the basis of my original residence as a starting point.
On the other end of the ledger, while Prop 19 still covers the transfer of a family home between parents and their children, including through inheritance, the tax value can only be transferred if “the property continues as the family home of the transferee.” In other words, if I inherit my parents’ property, I can only keep their tax basis if I continue to use that property as my primary residence. If, on the other hand, I want to use the property as an investment, I will not get the benefit of the property’s original basis.
In short, in order to create some financial viability for Prop 19, the reduction in tax income resulting from the easing of tax basis transfers for older homeowners has been offset by an increase in tax income from inherited investment properties. In other words, some of our clients will save money as a result of Prop 19 (homeowners over 55 who move within California), while others will pay more (children who inherit property for use as an investment). “
In short, if you are over 55 and are downsizing in California, there is no need to worry about a property tax increase. Even if you are upsizing, a property tax consequence will be much less than before. If you are inheriting a home, you may want to think twice before converting it to a rental home.