The November 2020 election is right around the corner and a measure which could impact real estate is up for grabs on the ballot. Agents and brokers need to know the ins and outs of Proposition 19 (Prop 19) and learn how it could impact them moving forward.

What exactly is Prop 19?

Prop 19 would impact California homebuyers (and their heirs) in two big ways:

  • it would eliminate provisions which allow parents to transfer ownership of a home to their children without tax consequences; and
  • expand rules allowing California residents age 55 or older to transfer the tax value of their home when they purchase a new one.

In short, Prop 19 would let more homeowners take their already steep tax breaks with them anywhere in the state when they sell their home, even if they’re upsizing. And they would be allowed do this back-to-back-to-back.

Why is Prop 19 on the ballot now? Similar propositions, such as Prop 5 in 2018, have been on the ballot before and failed. Prop 19 is aimed at changing the inequities stemming from Proposition 13 (Prop 13).

Prop 13 caps property taxes at 1% of the purchase price with annual increases of no more than 2%. When property is sold, the tax value is reset to match the sale price. It benefits wealthy property owners disproportionately and places the greatest tax burden on new homebuyers and current renters, those typically least financially able to bear it.

Editor’s Note – The California Association of Realtors (C.A.R.) is one of the sponsors behind this measure. The trade association has long supported legislation that boosts tax incentives for senior homeowners to move them into new homes. Prop 19 is C.A.R.’s second shot at Prop 5, an initiative California voters rejected in 2018 which would have had the same effect.

How would Prop 19 affect tax assessment transfers?

Prop 19 would add and extend certain rights under a measure previously passed in 1986. Proposition 60 (Prop 60) allows property owners age 55 or older one chance to purchase a cheaper home in the same county and transfer the tax value of their former home to their new home.

More specifically, Prop 19 would further extend rights under the previous measure by:

  • allowing moves anywhere in the state, meaning homeowners would be able to keep their lower property tax bill when moving to another home;
  • allowing the purchase of a more expensive home which would increase property taxes, but to an amount lower than what other homebuyers would be taxed; and
  • increasing the number of times a homeowner can use these special rules from one to three.

The measure would apply to persons over 55 years old and those with severe disabilities. Disaster victims would still be allowed only one transfer.

No more free inherited properties

In California, parents and grandparents may transfer primary residential properties to their children or grandchildren without the property’s tax assessment resetting to the market value.

Prop 19 would end the parent-to-child and grandparent-to-grandchild exemption in cases where the child or grandchild does not use the inherited property as their primary residence, but instead uses it as a rental property or second home.

When the inherited property is used as the main residence and is sold for $1 million more than the property’s taxable value, an upward adjustment in assessed value would occur.

Starting February 16, 2023, the taxable value of an inherited principal residential property would be adjusted each year at a rate equal to the change in the California House Price Index.

The reason this provision is part of the measure is because past investigations, including a report by the Los Angeles Times, have found 64% of inherited homes were second residences. The resulting tax break deprived schools, cities and county governments of nearly $300 million in taxes.

The two provisions in Prop 19 would further exacerbate California’s housing crunch. It heightens hurdles for first-time homebuyers who will face older, tax-advantaged buyers in an already tight housing market.

While Prop 19 would boost home sales volume in the short run, it would create more problems than it solves in the long run. Prop 19 only serves to further entrench Prop 13’s inequities.

Stay with first tuesday as we continue to analyze the November election’s potential impact on California real estate.