Today I’ll share questions and comments from readers about my column last weekend on Proposition 19, the November ballot measure that would give older people and disabled homeowners more ways to transfer their property tax base from one primary residence to another. It also would sharply reduce the ways parents and children can transfer real estate between each other without having the properties reassessed at market value.
The proposition is complex; you can check out my previous column at bit.ly/prop19qa.
To recap, in California properties generally are assessed at market value when they change hands. In between transfers, the assessed value can only go up by an inflation rate capped at 2%, plus the value of new construction or major improvements. Each year, the assessed value (also called the taxable value or adjusted base year value) is multiplied by the tax rate to determine the tax bill. Assessed value is usually lower than market value, so when homes are sold after many years and reassessed, the property tax goes up, often by a lot.
Current law allows several exemptions from reassessment when properties are sold or transferred. One lets homeowners who are at least 55 or severely disabled sell their primary residence and transfer its tax base to a new primary residence of equal or lesser value in the same county, or in one of 10 counties that accept incoming transfers. The replacement home must be purchased or newly constructed within two years before or after the sale of the original home. They can use this exemption once.
Prop. 19 would let these senior or disabled homeowners transfer their tax base from a primary residence to a new one of any value in any California county, up to three times. However, if the replacement home is worth more than the original home, the difference in market values would be added to the assessed value. Prop. 19 would extend this benefit to people who lost their homes in a declared natural disaster.
One reader took exception to my statement that this older-adult/disabled “portability” provision would apply to home sales starting April 1.
“Nothing in the text of the proposition says that the sale of the home must occur after April 1, 2021,” he wrote. “The language says only that the transfer of taxable value from the original home to the replacement home must occur on or after April 1, 2021. This means that someone could sell their home before April 1, 2021, and transfer it to a replacement residence, so long as the transfer occurs within the two-year window required by current law (and this proposition). The transfer, though, must occur after April 1, 2021.”
I checked with many experts and got conflicting answers. David Wolfe, a consultant to the Yes on Prop. 19 campaign, agreed with the reader and said that if Prop. 19 passes, an eligible homeowner who has already sold a primary home “would need to wait until after April 1 of 2021 to buy a replacement home — so long as the replacement home is purchased within two years of the sale — and transfer the tax base under Proposition 19’s new rules.”
But David Yeung, deputy director of the California Board of Equalization’s property tax department, said, “If Prop. 19 passes, it will become effective April 1, 2021, and the current law will sunset on the same date. The date of the first transaction will determine which version of the law will be operative for the base-year transfer. In other words, if you buy or sell before April 1, 2021, the old law is operative. If you buy or sell on or after April 1, 2021, the new law will be operative.” The board issues guidance on property tax law to county assessors.
Glenna Schultz, the board’s senior specialist property appraiser, said it’s not clear-cut and the Legislature will need to clarify. San Francisco Assessor-Recorder Carmen Chu agreed. “The ballot measure is not explicit as to whether only the purchase transaction must be after April 1, 2021, or whether both sale and purchase transactions must be after April 1, 2021. This is the type of question that is typically addressed in the implementing legislation,” she said.
Here are other questions readers had:
Q: In December 2017 I rented out my house in San Mateo County and moved into a home I’m renting in Placer County. My home on the Peninsula is assessed at $117,000; Zillow estimates the house is worth $1,850,000. If Prop. 19 passes, I would sell the Peninsula property and buy something here and transfer my property tax. Do I need to move back into the rental property to establish residency?
A: “If they want to take advantage of Proposition 19, then they would need to move back into the rental property to make it their primary residence,” Wolfe said.
How long the homeowner would have to stay there before selling “is unclear, and there is very little guidance. The safest route would be to move into it completely, change all the utilities to it, claim the homeowner’s exemption on it and stay for at least one federal/state tax cycle,” said Brad Marsh, a tax attorney with Greenberg Traurig.
Yeung added, “If the property owner did not file for the homeowners’ or disabled veterans’ exemption, the county assessor will be looking for evidence such as income tax returns, voter registration, vehicle registration, and bank statements.”
Q. My wife and I own a home in San Francisco and Santa Rosa. We occupy both homes, but only one can be claimed as our primary residence. When we pass away, our son will inherit both properties. Prop. 19 is clear on how the assessed value and property tax will be determined for our primary residence. Do you know the current law for how the non-primary residence is assessed upon inherited transfer? Will Prop. 19 impact the non-primary residence?
A: This question illustrates how Prop. 19 would change the rules for transfers of property — by sale, gift or inheritance — between parents and children, starting Feb. 16.
Yin Ho, a real estate attorney with Withers, explains: Under current law, a husband and wife can transfer a primary residence, of any value, to their son and it won’t be reassessed. They can also transfer other property — such as second homes, commercial and rental properties — and a limited amount will be excluded from reassessment. The “other property exclusion” is limited to $1 million of adjusted base year value (not market value) per person, he said.
Under current law, the husband and wife can use the principal residence exclusion on either the San Francisco or Santa Rosa home (whichever qualifies), and the “other property” exclusion on the second home. For the other property, the husband and wife should find their adjusted base year value on their most recent tax bill. If the adjusted base year value is equal to or less than $2 million, then 100% can be excluded from reassessment. If it’s more than $2 million, the amount that exceeds $2 million is reassessed to present-day value, Ho said.
Note that the $1 million per person exclusion “is a lifetime amount. Once you use it up, it’s gone,” said Kelly Cruz, director of strategic planning with Aspiriant. A married couple can transfer up to $2 million, but if each uses $500,000 and one passes away, the surviving spouse has only $500,000 left to transfer.
If Prop. 19 passes, starting Feb. 16 the “other property” exclusion is eliminated. The son may still inherit the second home, but it will be reassessed at market value at the time of transfer, Ho said.
In addition, the principal residence exclusion will be limited. To get any exclusion, the son must use his parents’ principal residence as his main home. If the difference between this home’s assessed value and market value is $1 million or less, the assessed value will carry forward. If the difference is more than $1 million, the assessed value will be increased according to a formula, but not to full market value.
If Prop. 19 passes, Cruz said families with substantial real estate should consider transferring property before Feb. 16. However, there’s a trade-off. “If you were planning to leave the property to your children when you die, you would lose the step-up in basis” that property gets under current law when it is transferred at death. This step-up lets heirs avoid income tax on inherited assets if they sell them right away. Presidential candidate Joe Biden has proposed eliminating this step-up in basis, however.
Kathleen Pender is a San Francisco Chronicle columnist. Email: kpender@sfchronicle.com Twitter: @kathpender
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No easy answers to questions on Prop. 19 - San Francisco Chronicle
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