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Billion Dollar Tax Trap for Property Owners - Were we Duped with Prop 19?

Posted by James Burns | Dec 10, 2020 | 0 Comments

California voted on Proposition 19 this November, and it passed with 51% of the vote.[1] The Proposition gives new property tax breaks to older homeowners, gives relief to disabled Californians and those affected by wildfires, but strips tax breaks from certain individuals who inherit homes.[2] The Proposition leaves us questioning who benefits from the changes, and who is adversely affected.

             Proposition 19 builds off of California Proposition 13, which was passed in 1978, and provided that property taxes would be capped at 1.1% of the home's sale price and increase no more than 2% a year until the property is sold. Proposition 13 provided a massive benefit to homeowners who were fortunate enough to have their property appreciate in value after purchasing, since their property tax increase was capped at 2% per year and likely did not keep up with the increase in the value of their home.

             Proposition 19 sought to remedy a problem caused by Proposition 13, namely that homeowners benefiting from Proposition 13 were discouraged from moving into a new home since it would mean a surge in property tax. Proposition 19 gives homeowners 55 and older (or those with severe disability) the chance to move into a home of equal or lesser value while still retaining the tax benefits of Proposition 13. Prop 19 also allows the same older homeowners to purchase more expensive homes and receive a reduction in the property tax they owe based on the value of their prior home. This group of older homeowners are able to use this ability up to three times. Proposition 19, therefore, will provide a massive benefit to those older homeowners already benefiting from a favorable tax scheme. In addition to this class of homeowners ages 55 and up and those with severe disability, disaster and contamination victims will be allowed one transfer of the same kind as opposed to three.[3]

             So, who loses out from Proposition 19? The biggest group negatively affected by Proposition 19 will be those who inherit homes without making them their primary residence. Prior to Proposition 19, children who inherited homes from their parents were allowed to own the property as investment or rental property, while still maintaining any benefits their parents received from Proposition 13. In some cases, this allowed these individuals to rent out their inherited homes while paying taxes at a fraction of the home's value. The California Legislative Analyst's Office found that ending this break for inherited property would generate enough revenue to offset the loss in revenue from giving a break to homeowners 55 or older.[4] This means that most beneficiaries of inherited property will now lose any Proposition 13 benefits they would have received, and the earned revenue will offset further tax benefits for homeowners 55 and older who have already been benefiting from Proposition 13.

             Additional revenue from Proposition 19 will be used to create the California Fire Response Fund (75% of calculated revenue) and County Revenue Protection Fund (25% of calculated revenue).[5] The County Revenue Protection Fund will be used to provide financial assistance to counties that receive less revenue as a result of Proposition 19, and the Fire Response fund will be use to fire department staffing and full-time fire department personnel.[6]

 The end result of Proposition 19 seems to be a big break for homeowners 55 and older, allowing them three opportunities to purchase new homes while retaining at least some of their Proposition 13 benefits.  Disaster and contamination victims are slightly less fortunate, receiving one transfer rather than three. The least fortunate are those individuals who had previously inherited property from their family and chosen to rent it out, since they lose any benefits from Proposition 13 and will have their property tax reassessed and increased based on the current market value of the property.

[1] Associated Press 2020 US Election Results.

[2] https://www.latimes.com/homeless-housing/story/2020-10-19/proposition-19-property-tax-ballot-measure-explained-california.

[3]https://ballotpedia.org/California_Proposition_19,_Property_Tax_Transfers,_Exemptions,_and_Revenue_for_Wildfire_Agencies_and_Counties_Amendment_(2020)

[4] https://lao.ca.gov/BallotAnalysis/Proposition?number=19&year=2020.

[5]https://ballotpedia.org/California_Proposition_19,_Property_Tax_Transfers,_Exemptions,_and_Revenue_for_Wildfire_Agencies_and_Counties_Amendment_(2020)

[6] Id.

About the Author

James Burns

Estate Planning, Asset Protection, Business and Real Estate Transactions, nutraceutical Law and franchising:

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