Roadmap with Irina - May 2023

This article is intended to be a general overview of Prop 19, and every situation is different so please be sure to consult with YOUR experts before you make any decisions.  Let me know if you need referrals for expert help.

Prop 19 (implemented in 2021) impacts how much property tax you (or your heirs) will pay when
a) you sell and buy a new house or
b) you pass it to your heirs.
Prop 19 addresses Property Taxes in California only and does not impact Capital Gains Taxes.

A little bit of history
Before 1978 (About when “Santa Clara Valley” started to become “Silicon Valley”) houses were appraised every 1-5 years so assessed values were kept at about market value.  But this meant that your property taxes would go up every year as home prices started to really climb:  This was hard on those with fixed incomes.
According to Proposition 13 passed in 1978:
a) Limited assessed valuation increases to 2% per year
b) Houses were only reassessed when sold or new construction completed
c) Voters could add special assessments (eg: to pay for local schools)
Prop 58 passed in 1986 which essentially allowed for exemptions to reassessments for transfers between parents and children regardless if they lived there or not.
Props 60 & 90 allows most sellers 55+ to do a ONE TIME transfer of their low Property Tax basis to the purchase of a lower price home in selected counties.
Prop 19 replaced Prop 60 & 90 and Prop 58 and became effective on February 16, 2021.

Before and After Prop 19
Before:  
A homeowner could transfer their house to their children (or a few other relatives) and the property would NOT be reassessed.  This meant that the child would keep the low property tax rate whether they lived in the house or not. (The same rule applied to the first $1M in assessed valuation of NON-RESIDENCE property)
After:
A homeowner could transfer UP TO $1MM of their house’s assessed value to their children (or a few other relatives) IF IT WILL BE THE CHILD’S Principal Residence (Non-Residence Properties will be reassessed upon transfer no matter what.)

Good and Bad news about Prop 19
GOOD:
Allows Sellers 55+ to transfer up to 3 times (not just once as before)
Allows transfers anywhere in the state (not just selected counties)
Can buy a more expensive house and benefit from a blended property tax assessment. 
The BAD news is that your heirs get to keep your low property taxes ONLY IF they live in the house as their principal residence (And then only $1MM is exemped).
 
Example of Selling and Buying UP under Prop 19 today
You bought your house in 1973 for $150,000. Over the years, the assessed valuations goes up to $250,000 today. You sell your home for $1,000,000 and then buy another home in California for $1,500,000.
Your NEW property tax will be based on:
Your current tax basis of $250,000 PLUS $500,000: the difference between the market value of your OLD home ($1M) and the NEW home ($1.5M) =$750,000

How to Calculate Prop Tax on an inherited property
Essentially your heirs get a $1,000,000 exclusion from the tax calculation.
Example:  Your home has an assessed value of $300,000 and it is “worth” $2,500,000 now.  You can add $1,000,000 to your current assessed value $300k (+) $1M (=) $1,300,000.  The difference between $1.3 and the $2.5 value (=) $1,200,000.  Add this to your current assessed value of $300,000 and your new property tax will be based on that number of $1,500,000.
 
Going Forward
Expect clarification and changes to the laws. There “might be” some workarounds but they are unproven so talk to your advisor.
For your heirs, (assuming that they don’t make your house the principal residence), their property tax will increase to market value upon your passing (may take many months to get the supplemental bill).
Calculate Property Taxes at ~ 1.25% of its value (For a $3,000,000 house, annual property taxes will be about $37,000 a year! It may change the “value” of an inherited property if the property taxes will increase dramatically.
 
Resources

1. State Board of Equalization: HERE 
2. Your County’s Tax Assessor (Larry Stone for Santa Clara County) HERE
3. Online Estimator HERE
4. Frequently Asked Questions (FAQs) HERE

Capital Gain Calculation
Capital Gains are calculated like this:
Sales Price (-) Selling Costs (-) Improvements (-) Purchase Price (-) Your exemption* (=) Your capital Gains.   Your taxes will be approximately ⅓ of that amount!  GN&BN!
Tax exemption is $250,000 for single homeowners and $500,000 for married couples.
Note: Cost basis changes to Market value at the date of death of the first spouse.

Capital Gain Calculations Example
You and your spouse bought your home many years ago for $500,000 and made improvements over the years of $300,000.  You sold it for $3,500,000 and it cost you $180,000 in selling costs (Staging, commissions, inspections, fix up, etc)
Here are the calculation: 
$3,500,000 minus $500,000 minus $300,000 minus $180,000 minus $500,000 equals $2,020,000.  Plan to pay about ⅓ of this amount in Capital Gains tax.
Important exemption:  If one spouse passes before the house is sold, the Cost Basis goes up to today’s value and the Capital Gains essentially goes away. Talk to your accountant for details. 

If you own a home and DON’T have a Trust, I suggest you talk to a Trust and Estates attorney to see if it makes sense to set one up.  It can be a huge help for your heirs to know and follow your wishes.  AND it avoids Probate which can be very expensive and time-consuming.