California Proposition 19, the Property Tax Transfers, Exemptions, and Revenue of Wildfire Agencies and Counties Amendment, was recently approved by a 51.1% majority vote. Now, many homeowners are wondering how they will be impacted as we move into 2021. Let’s take a closer look!
A YES on Prop 19: The Impact on Homeowners
Proposition 19 was on the ballot in California as a legislatively referred constitutional amendment directed at changing specific property tax rules. Here is what the YES vote means:
Change in Tax Assessment for Eligible Homeowners
Under the previous law, virtually all California homes were subject to a post-purchase reassessment of their tax value. This meant that anytime someone moved, they would be taxed on the value of their new home. However, Prop 19 allows “eligible homeowners to transfer their tax assessments anywhere within the state and [allows] tax assessments to be transferred to a more expensive home with an upward adjustment.” It also increases the number of times eligible homeowners can transfer their assessments from one to three.
The hope for Prop 19 is that it will encourage more home sales for those over 55 by reducing their concerns about rising tax bills. According to Daniel Yukelson, executive director of the Apartment Association of Greater Los Angeles, “This is a proposal being put forth by the real estate industry to gin up commissions by encouraging older Californians to sell their homes.” Over the past few years, the number of real estate transactions on homes owned by baby boomers has declined due to economic insecurity. Prop 19 has the potential to reverse the trend, promoting higher transaction velocity and allowing younger generations to penetrate the housing market.
To get a better idea of how this works, let’s look at an example. If a 58-year old resident has been living in their home for the last 20 years – a house they bought for $200,000 – they might be reluctant to move because even downsizing would result in an increase in taxes. With the new proposition, they can now move to a smaller home without that financial hardship, ultimately freeing up more inventory for growing families who might purchase the vacated home.
Change in Tax Assessment for Inherited Homes
While making life a little easier for long-time homeowners, Prop 19 also places new rules on inherited homes. Inherited homes that are not used by principal residents – for example, second homes or rentals – must be reassessed at market value when transferred. This is a change to current laws, which allowed homes to be transferred without a reassessment of property value – A loophole that has been financially burdening counties for years. There is one exception: If the family member who inherits the property resides in the inherited home, then the first $1 million would be exempt from reassessment when transferred.
For example, under the previous law, if a daughter inherited her parents’ home in Palo Alto, she was previously able to rent it out and continue to pay property taxes based on her parents’ rates. But under the new proposition, she will need to move into the home if she wants to keep the tax bill low; otherwise, she must be prepared to pay higher taxes.
The state is expected to financially benefit from this change. According to Prop 19, these are a few of the expected perks:
- Both schools and local governments could gain tens of millions of dollars in property tax revenue per year. These gains could grow over time to a few hundred million dollars per year.
- Revenue from other taxes could increase by tens of millions of dollars per year for both the state and local governments. Most of this new state revenue would be spent on fire protection.
Santa Barbara Mayor Cathy Murillo reported that “[Proposition] 19 will create a historic fire fund that cannot be rated.” She concluded, “This will help many communities in the Central Coast by providing firefighters with resources that are desperately needed. More than that, Prop. 19 will also generate hundreds of millions of dollars for local governments and school districts.”
The new changes are set to commence on February 16, 2021.
Benefits for Homeowners: Selling High, Keeping Taxes Low
Like in the first example above, the most significant benefit for current homeowners affects those who are ready to downsize but can’t financially commit to the higher taxes they might face. They can now safely transition into a retirement home and allow the next generation to enjoy the same slice of the American Dream they have enjoyed: homeownership. In the current market, this is a welcome change.
Over the past few years, housing inventory in the state has remained low, and with the current low-interest rates, buyers are flocking to the market despite the fact that homes are hard to come by in this seller’s market. Luckily, with the passage of Prop 19, more properties should become available as more eligible homeowners will finally be able to transition to smaller homes (or bigger!), all while benefiting from current economic trends.
While some detractors have expressed concerns about a glut of housing, the influx in available homes resulting from this proposition is not expected to flood the market; home prices will remain high, allowing homeowners to maximize their sale.
Looking at the Numbers
Homeowners in Santa Cruz County, especially, may find themselves in a particularly good position. The average home price in the county in 1999 was $400,439. The county’s average value in 2019 was $1,015,087 – a 153% increase in home values over the last two decades! Those who bought in 2009, when home prices averaged $546,006, have experienced an 86% average increase in their home value. For anyone mulling over a transition into their next home, the savings from this tax may make that decision easy.
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