Property tax laws are changing in California.
Throughout the past year, the real estate housing market began slowing down, especially in the older demographic. Older people were less likely to buy or sell a home than younger generations.
Over the course of two years, the California Association of Realtors put together a plan known as Proposition 19 (or commonly, Prop 19). The overall goal of this proposition is to motivate older homeowners to buy and sell their property.
Prop 19 offers tax incentives to older California residents who buy a new home, but with these benefits come a few drawbacks. To balance the tax breaks of Prop 19, it includes higher property taxes for others.
Could you benefit from Proposition 19? Here’s what you need to know about California’s new Proposition 19.
What is Proposition 19?
Proposition 19 is a proposed tax change that Californians voted to approve in 2020. Two parts take effect on February 16th and April 1st of 2021.
The proposition offers a mix of tax changes designed to assist elderly individuals, some people living with disabilities, and natural disaster victims. Proposition 19 will also raise property taxes for those inheriting a second house to use as an investment property.
How Older Californians Will Benefit
California’s Proposition 19 proposes that seniors — those aged 55 and over — can receive a tax incentive when they buy a new home.
When you buy a new home, you’ll have to pay property taxes based on the home’s current value. If you buy a more expensive home, your property taxes will increase accordingly.
Proposition 19, however, waives this property tax increase for homebuyers who are 55 and older. Rather than having to pay a higher property tax for a new home, they can pay a much lower property tax. Starting April 1st, older residents have the opportunity to buy a home of equal or lesser value and enjoy the same tax benefits as their old home.
The reason behind this is to address the surge in prices and value. The longer you own a home, the more tax benefits you can enjoy from lower property taxes on its older assessed value. Your home may rise in value, but your property taxes and tax bills remain the same.
When you sell, you’ll likely earn a nice profit, but you’ll face higher property taxes and fees when you buy a new home at a higher assessed value. This is a major reason many older generations are hesitant to sell and move into a new home.
Proposition 19 will make buying and selling real estate an easier decision for older generations. Elderly homebuyers have an opportunity to buy a home and enjoy these tax benefits.
Another goal of Proposition 19 is to help alleviate the lack of housing for aging adults. Currently, there isn’t enough available senior housing to accommodate everyone. The ability to buy a new home at a lower tax value can help with this shortage.
What If Someone Buys a More Expensive House?
Do these property tax benefits extend to those buying a more expensive house? The answer is yes, but not it’s not as progressive as it would be if you bought a house of equal or lesser value than your current home.
Imagine you bought a house 30 years ago for $600,000 and today, you can sell it for $1 million. The new house you’re looking to buy costs $1.2 million.
When you buy this new home, your property tax will be based on the sum of your previous home’s old assessed property value, plus the difference between the sale price of your old home and the purchase price of the new home. The property tax value you’d pay would be $800,000 (ie. $600,000 + $1.2 million – $1 million).
This tax break has a limit of three uses. Buying and selling a fourth time will cause your property taxes to rise to today’s market value
Others Who’ll Benefit
Proposition 19 isn’t solely for assisting elderly people. Those living with severe disabilities, and those who lost their home in a natural disaster, can also benefit. Like seniors, those who survived natural disasters, such as earthquakes or wildfires, can enjoy many of the tax benefits offered by Proposition 19.
The additional tax revenue generated by Proposition 19 can help natural disaster victims, as well as generate funds to help fight wildfires.
Younger buyers, and the real estate industry as a whole, will also see benefits as more homes are put on the market that may previously have been held tight by seniors. Many real estate professionals throughout California and the country are supporting Proposition 19. But more than the benefits it offers to the health of the real estate market, many count on this new law to help Californians in need.
How Proposition 19 Balances the Tax Benefits
Unfortunately, Proposition 19 doesn’t conjure these tax advantages out of thin air. To balance the lower property tax on seniors who relocate, younger generations will have to pay higher property taxes on any home they inherit from their family. But only if they intend to keep the inherited home as a second house or a rental property.
Over the past ten years, children and grandchildren who inherited property from older family members benefited the most from California’s property tax laws. When they inherited a property, even as a second or third property, they could continue paying the same tax rates as their parents or grandparents, essentially locked in at a lower assessment.
This inspired many young beneficiaries to use the property as an investment. They could rent out the property at current market rates, while paying taxes based on an assessment that was anything but current.
Proposition 19 aims to eliminate this property tax break for those who plan to use the property as an investment. First time buyers who inherit a property and use it as their primary residence can continue paying the same tax rates as their parents.
Adjusting these tax breaks would generate enough tax money to offset the new tax breaks granted to the elderly, natural disaster survivors, and those with disabilities. This part of the Proposition took effect on February 16th, 2021.
Will Proposition 19 Affect You?
Proposition 19 aims to assist the elderly and others who need help in California, while also generating tax revenue for schools and natural disasters. If you are a senior looking to move, or a younger individual inheriting a home to live in, you can enjoy the benefits that Proposition 19 provides.
Have questions, or are you looking to buy or sell a home? Let us know! We’re happy to help you and anyone you send our way to make the most of your real estate goals.