By Rachel Puryear, Attorney and Broker
California just passed Proposition 19, a mixed bag of changes to its property tax rules. Here’s a breakdown of the good, the bad, and the ugly of what it means for California homeowners, their families, and even their tenants.
- The Good: Who Wins from Prop 19:
Homeowners over 55 (as well as people who are severely disabled, or lost their homes in a wildfire) can move up to 3 times anywhere in the state, and still keep their current tax assessment. If the new home is more expensive, they can also blend the taxable value of their old house with the purchase price of a more expensive home. So, for instance, (according to an example calculated by the LA Times), let’s say someone now over 55 bought a home worth $200k, years ago. So they now pay about $2,200 a year in property taxes, even though the value of their home is now $600k. But then they move to a home worth $700k. Without Prop 19, they would have paid about $7,700 a year on the new home. But with Prop 19, they pay about $3,300 a year in property taxes. They can take the property tax rate of their own home, and only pay an increase in property taxes for the amount that made up the difference between the old home and the new home, instead of paying the increased rate for the whole value of the home. And such homeowners can do this property tax port 3 times now, whereas they could only do it once without Prop 19.
- The Bad: Who Loses from Prop 19:
The big down side is, people who inherit homes and do not live in them as their primary residence, now get reassessed and pay much higher property tax rates than without Prop 19. So whereas before Prop 19, a child inheriting a house from a parent (or a grandchild inheriting from a grandparent under certain circumstances) would keep the same property tax rate their parent or grandparent had, regardless of how they use the home. But now, such a child only keeps their parent’s tax rate if the child lives in the home as their primary residence – if the child uses the home as a second home or a rental, then it gets reassessed to current market value.
Note that the language of Prop 19 refers to a child “intending” to live in the home after inheriting it as qualifying the child for keeping the tax break. So how the parents used it is apparently not the determining factor, rather it is how the child will use it. How long the child must use the home as their primary residence to qualify, is not yet clear from the language of Prop 19. Nor is it clear how Prop 19 applies to a child who lives in an inherited multifamily rental, and rents the other units – my educated guess would be that the tax break would likely apply to such a child living in a building with 4 or fewer units, and renting the rest.
The Ugly: Possible Consequences for Below-Market Renters:
Supporters of Prop 19 may or may not have considered that the removal of tax breaks for inherited rental units could create a horrible future mess for below-market rate/rent-controlled tenants who rent from mom and pop landlords. Whereas a child who inherits their parents’ rental and might have kept renting it out as their parents did before Prop 19, such children will now much more incentivized to either evict the tenants and move in, or sell the home to new owners who will likely also want to evict the tenants. We shall see how that plays.
Perhaps the break could apply as long as the tenants’ rent remains rent controlled or sufficiently below market rate – as an idea for a more thoughtful amendment to Prop 19.