California’s real estate sector has recently been beset by phenomenal changes in how assessment of the state’s property taxes is done with the imposition of California Proposition 19.
Passed as a constitutional amendment through a ballot vote in November 2020, Proposition 19 provides a more detailed and expanded approach to the transfer of property tax assessments.
There is much to learn about Prop 19 and its impact on people with properties within the Golden State. This article will delve into the changes caused by this amendment, as well as the advantages and disadvantages to you as a California property owner.
Here is everything there is to know regarding California and Proposition 19.
California: An overview
Let us first look at this progressive state that is now feeling the effects of these recent tax reforms in real estate: California.
Referred to as the Golden State for references to the Gold Rush of the mid-1800s, California takes the top spot as the most populous state in the nation. 2019 population estimates by the U.S. Census show that the state not only has the biggest population (almost 40 million) but also a remarkably diverse one at that. However, population growth has been observed to slow down lately – a direct effect of the state having been hardly hit by the pandemic in the second half of 2020, as well as a decrease in birth rates and people moving out to other states.
The land
California is the third-largest in the country in terms of land area, covering 163,695 square miles. Its topography is just as diverse as its residents as it includes massive mountain ranges like the Sierra Nevada and Tehachapi Mountains, sprawling valleys like the renowned Napa Valley and Central Valley, desert regions like Death Valley, as well as wide swaths of forests. Then as you proceed westward, you will be greeted by a whopping 840 miles of coastline on the fringes of the Pacific Ocean.
The vibe
Much has been said about California stereotypes, the most enduring of which is how Californians can be quite hip and laid-back. Dress code-wise, residents may agree. However, they are also headstrong economic movers, as reflected in the likes of Silicon Valley and the grandiose estates in Southern California.
And, while Hollywood is home to the best and brightest in TV, movies, and film, residents debunk the myth that not everyone who moves to the state wants to become a movie star.
However, Californians do put a premium on health and fitness. This is why the state has an abundance of vegan-friendly restaurants, fitness centers, and other venues and activities that cater to this healthy lifestyle. Moreover, the Golden State ranks at #5 among 10 states with the lowest obesity rates, with only 26.2% of the population considered to be obese.
The grandeur
Most people will simply associate California with its beaches, Hollywood, and the Golden Gate Bridge. (And for basketball fans, Michael Jordan and Stephen Curry.) But apart from these, California is also known for its world-class wines courtesy of Napa Valley, the centuries-old redwood trees in the Redwood National and State Parks, the tech giants in Silicon Valley, and Disneyland in Anaheim.
All in all, California can be considered as a huge influential guide in popular culture, news information, economics, innovation, politics, and many more.
California and property taxes
In real estate circles, California is best-known for having among the highest property taxes in the country – much higher than other taxes imposed on Californians.
However, California homeowners have been given several opportunities to apply for tax breaks or incentives that have helped in buffering the sting of equally high property values. These said breaks have been set into motion through several state laws, such as Proposition 13, Proposition 58, and now, Proposition 19.
Proposition 13
The establishment of Proposition 13 in 1978 became a solid foundation for the development of California’s property tax system. It has three major attributes:
- The establishment of base year values for properties in the state;
- Property taxes to be slated at 1% of the property’s assessed value; and
- Putting a 2% cap on the yearly increase in assessment values for properties.
Proposition 58
Also known as the Reappraisal Exclusion for Transfer between Parent and Child, Proposition 58 gave importance to keeping wealth all in the family. Under this proposition, a child can inherit certain properties from their parents at the same tax assessment value as what the parents have been paying, provided that several conditions are met:
- This applies to the transfer of primary residences.
- If the property is not a primary residence, the first $1 million worth of real estate will be affected by the said exclusion.
- Should the property to be transferred exceed $1 million, only the first $1 million will be assessed at base year value, not fair market value. Reassessment will be for the excess.
While the intent for both Prop 13 and 58 was noble, it also led to a curious phenomenon known as the Lebowski Loophole.
The Lebowski Loophole
Credit for the name of this legal anomaly goes to the 1998 movie and its lead actor who – together with his siblings – found a loophole in the statutes of a 1986 amendment to Prop 13 and profited immensely from a Malibu property they inherited from their parents. All this, despite paying taxes at less than half of the property’s intended assessment value.
The Oscar-winning actor from The Big Lebowski was not the only one using this method in California property tax assessment. Using the Lebowski Loophole was apparently commonplace among the elite on the East Coast.
The unapproved measure: Proposition 5
Prop 13 and its amendments kept property taxes low. Perhaps, during the time of the original proposition’s inception, the 1% cap in tax assessment value and the 2% yearly adjustment may have worked for California properties. However, much has changed in the state’s real estate sphere since the late 70s. Property values have since skyrocketed to astronomical heights by more than 2% annually. As a result, property tax rates throughout California were left behind, still languishing at 1% to 2% of total property value.
With property tax assessments this low, the need to sell properties lost its charm – especially among the older set of Californians. Many of these seniors held on to their large homes even after the children have left, leaving them with too much house to maintain as they advanced in years. Thus, in 2018, the California Association of Realtors sponsored Proposition 5.
Prop 5 would have given both people 55 years old up and those with severe disabilities the ability to transfer tax rates from their existing homes to new ones under the following conditions:
- The new home should be of equal or lesser value than the existing home;
- Transfer of residence should only be within the county; and
- Transfer using this initiative can only be done once.
While this measure would have helped these specific sectors, Prop 5 could bring financial losses to others (e.g., schools) from lack of revenues collected. Some counties were also not willing to participate in the said initiative, thus, limiting options for transfer.
Prop 5 eventually lost by ballot vote.
The comeback: Proposition 19
With the death of Prop 5, sponsors of this first bill decided to file another measure that will still provide transfer opportunities to older residents – but with expanded coverage and exemptions. Moreover, it aims to do away with the Lebowski Loophole that has been abused for an enormous profit. To further sweeten the deal, the sponsors chose various wildfire agencies to become the recipients of revenues stemming from this bill.
Enter Proposition 19: the Property Tax Transfers, Exemptions, and Revenue for Wildfire Agencies and Counties Amendment.
Prop 19 was passed on November 3, 2020, and took effect April 1, 2021.
Proposition 19’s first goal: Ease property tax transfer
Prop 19 managed to take some aspects of Prop 58 but made some remarkable improvements in the following areas:
- Expanded eligibility of those who can use the said measure. Those who have lost their homes to wildfires or other natural disasters are now also eligible for same-value tax assessment transfers. Previously, it was just the 55-and-up age group and severely disabled owners.
- Wider coverage of properties applicable for tax assessment transfers. When before, tax assessment transfers can only be applied to home transfers within a county, Prop 19 now allows transfers to anywhere in the state. This gives eligible Californians more choices for a home that would cater best to their lifestyle.
- More chances to transfer tax assessment at the same value. Previously, eligible California residents can only use this transfer once. With Prop 19, they can use this benefit up to three times.
- The chance to buy a home that’s higher in value than the previous one. Earlier property tax measures only extended the transfer to homes that are of equal or lesser value. But with Prop 19, eligible California residents can aim to buy a new property with a higher market value than their existing one. All that has to be done is for the new property’s increase in value to be added to the transferred tax assessment value of the existing one.
Proposition 19’s second goal: Close the Lebowski Loophole
Previous property tax measures allowed the transfer of properties from parents to their children at tax base values from the time of the parents’ purchase. These resulted in some residents inheriting prime properties estimated to be worth millions from their parents but with property taxes priced at the barest minimum.
Moreover, these inherited properties were barely used as primary residences. They were, instead, converted into vacation rentals from which their new owners further benefited financially – but still at the same base year taxes from the time they were first bought.
Now, Prop 19 enforces stricter rules on property types for inheritance. Tax assessment transfers can only be done for inherited properties to be used solely as primary residences. Moreover, should their present market value exceed $1 million, the heirs will have to pay the corresponding taxes at fair market value for the excess.
Proposition 19’s third goal: Fund wildfire mitigation measures
Wildfires have always been a constant problem in California. Now, there will be a fresh resource for funding of measures to mitigate this issue.
The creation and approval of Proposition 19 has resulted in the creation of two fund sources that specifically target the wildfire issue: the California Fire Response Fund and the County Revenue Protection Fund. 75% of tax revenues from this measure will now go to the CFRF while 15% will go to the CRPF.
Weighing Proposition 19’s impact: Pros and cons
The positive impact of this 2020 property tax amendment will largely be felt among senior Californians, as well as those in areas that are most prone to wildfires. The tax adjustment resulting from Prop 19 is just the shot in the arm the state needs to reform its relatively outdated policies on property taxes.
However, this new measure has yet to address some issues, especially in the aspects of inheritance and property purchases from out of state.
The pros
- As mentioned earlier, the Lebowski Loophole that primarily benefited only an elite group of Californians has been closed. The emphasis on allowing tax assessment transfers only to primary residences, as well as the $1-million cap for allowed transfers will essentially require a reassessment of properties that were acquired using the loophole. Plus, an investigation into whether these properties were, indeed, used for anything else other than a primary residence could be underway.
- California’s empty nesters now have the freedom to unload themselves of the responsibility of maintaining a home that has become too large for comfort. Apart from the fact that they can downsize or move to good nursing homes, they can also bat for a home located not just in their county but anywhere in the state.
- Fresh funding for California’s wildfire response is bound to give more muscle to the endeavor.
The cons
- If you are an existing owner of real estate in California, Prop 19 will benefit you most. This is not so if you’re from out of state wanting to purchase California property. Acquiring this type of property will subject a newcomer not only to present-day home values but also to current tax assessment values that could, in total, run into the millions in terms of investment.
- If you are a low-income earner and your parents bequeath to you property worth more than $1 million, you will be obligated to pay for tax dues at present market value for the excess of $1 million. Your tax bill may go even higher if you decide to convert the property into a rental.
- During the early days of California’s real estate boom, many residents decided to invest in homes in low-income neighborhoods as these also generated a low property tax bill. However, as even more progress trickled into the state, some of these originally low-income neighborhoods transformed into upscale communities. When these same residents decide to let their children inherit these homes which they bought at a bargain, the children will have to deal with property taxes that may be way beyond their means. Moreover, the property may become difficult to hold on to as the children may also have their own homes elsewhere already. As a result, instead of these homes being lived in as primary residences, they are sold to non-family members. An unintended consequence, though: this scenario could, instead, become a chance to add to the depleted California housing inventory.
- An ideal tax system is one that requires everyone to pay their fair share of taxes. Since Prop 19 has yet to address issues in tax requirements for newcomers and low-income households, this measure does not work along the fair-share ideal.
Other issues to look into
Exemption from new tax assessment of transferred real estate is valid if that property was used as a primary residence by any of the qualified heirs immediately after the transfer. This applies to all properties, except for what is termed as the “family farm.” Since a family farm is loosely defined here, this could refer to agricultural land that may or may not have a home within its boundaries.
How to reduce property taxes
California is home to some of the richest, most cosmopolitan urban centers in the nation. That said, both property values and tax bills in the Golden State remain consistently high due to the upward pull of progress.
Given this truth, there are two ways by which you can lower your tax dues in the Golden State:
Make an appeal regarding your home’s tax value. You need to find a solid cause behind your appeal for a reassessment like a sudden “hiccup” in the local real estate market or home renovations that can count for tax breaks.
Make sure that you know all available tax breaks and use them. Many of these said exemptions involve several age groups; military personnel, the residence itself, aid in times of disasters, and family transfers. Make your bid to take advantage of tax breaks that relate most to you and your situation.
Consult with a reliable California real estate specialist. Their expertise, experience, and knowledge of the state will prove to be valuable as they can help you look at several options to keep you within your allotted budget for a home here.
Make the most out of Proposition 19 with one of California’s top Realtors
Given the overwhelming changes in the way California computes its property taxes through Prop 19, it is important to hire a real estate professional who knows the best action to take. A name you shouldn’t forget in relation to this is Martin Feinberg.
Having been in the industry of residential and residential income property sales and full-service property management for more than three decades, I can provide you with unparalleled and professional guidance in your real estate journey in California. My track record as a member of the Keller Williams Santa Monica team assures clients of unique information and a strong network backing that has made me one of the state’s most sought-after Realtors.
Call me, Martin Feinberg, at 310.729.6573 or email martin@martinfeinberg.com for a better grasp of Proposition 19.
