Property tax breaks to shift if voters OK Prop. 19

Proposition 19 would expand one property tax break and rein in another, with the net result being an increase in taxes that would go to public schools, state and local governments and firefighting agencies in California.

How much additional revenue the Nov. 3 ballot measure would generate, and how it would be split, is highly uncertain. The answer depends on how homeowners respond to the new tax regime, and a mindboggling formula for divvying up the spoils.

If passed, the changes would increase home sales, which is why the California and national Realtors associations have spent $ 36 million to promote it. The only spending against it has been $ 40,050 from the Howard Jarvis Taxpayers Association.

Do not confuse Proposition 19 with Proposition 15, which is also on the Nov. 3 ballot and would raise property taxes on most commercial and industrial ( but not residential) properties by reassessing them at least every three years.

Under Proposition 13, passed by voters in 1978, all real property in California is assessed at market value when it changes hands. In between sales or transfers, this assessed value can only go up by an inflation rate, capped at 2% a year, plus the value of any new construction or major improvements. Your property tax is the assessed value times your tax rate, which averages around 1.1%. When homes are reassessed

“In the first few years, local governments could gain tens of millions of dollars per year.” Report on Prop 19 by Legislative Analyst’s Office

after a sale or transfer, the tax bill almost always goes up because market values in California usually rise more than 2% a year.

After Prop. 13 passed, voters approved five propositions that exempted some properties from reassessment when they change hands. Prop. 19 would supplant them, with new ( but no less complicated) rules.

Under current law, people who are at least 55 or severely disabled can sell their primary residence and transfer its assessed value to a new primary residence if they meet three requirements: The home they buy can’t be worth more than the home they sold; the new home must be in the same county as the old one, or in one of 10 counties that accept incoming transfers of assessed value; and they can only do this once in a lifetime.

These are called Prop. 60, 90 and 110 transfers, after the old ballot measures that allowed them. The idea was to let seniors and disabled people sell a longheld home that had a very low assessed value, and buy a smaller or more suitable one, without facing a big tax increase.

Prop. 19 would let these same older and disabled homeowners transfer their old assessment to a replacement home of any value, in any California county, up to three times. It also would let people who lose their homes in a natural disaster transfer the assessed value from their destroyed home to another home anywhere in the state.

But there’s a catch: If they buy a more expensive home, the difference in market value between the old and new homes would be added to the old home’s assessed value.

Suppose a senior couple sells their primary residence, currently assessed at $ 300,000. They sell it for $ 1 million and buy a replacement home for $ 1.5 million. The new home would be assessed at $ 800,000, which is $ 300,000 from the old home plus $ 500,000 ( the difference between $ 1 million and $ 1.5 million).

This “portability” provision would apply to sales starting April 1. Eligible homeowners would have up to two years after selling their home to replace it and would have to apply for the transfer with the county they’re moving to.

The California Realtors Association placed a similar portability proposal on the ballot in 2018, but the Legislative Analyst’s Office estimated it would cost public schools and local governments hundreds of millions of dollars in property taxes a year. That proposition failed, getting only 40% of the vote.

That’s why Prop. 19, placed on the ballot by the Legislature, added a provision that would raise revenues by curtailing a tax break on parentchild transfers.

Under current law, a parent and child can transfer ( by sale, gift or inheritance) eligible properties between each other and they won’t be reassessed.

Eligible properties include a principal residence of any value, plus additional properties — such as a vacation, rental or commercial property — with a combined assessed value up to $ 1 million. Properties getting this tax break can have a market value far exceeding $ 1 million.

A child who gets an eligible property from a parent, or vice versa, can keep the property’s low tax base whether they live in it, rent it out or leave it vacant. These rules also apply to transfers between grandchildren and grandparents if the grandchildren’s parents are not alive. These are called Prop. 58 and 193 transfers.

Critics say they discourage heirs from selling homes and let wealthy families pass on valuable properties without a tax increase. The Los Angeles Times reported that actors Jeff and Beau Bridges and their sister inherited a fourbedroom oceanview home in Malibu from their mother, who owned it with her late husband, the actor Lloyd Bridges, since the late 1950s. In 2018, they advertised the home for rent at $ 15,995 a month, which was more than twice the annual property tax bill.

Prop. 19 would abolish this tax break on parentchild transfers of any property that was not used as a principal residence or farm. Any such properties transferred on or after Feb. 16 would be reassessed at market value. ( Prop. 19 would not trigger reassessment of such properties transferred before that date.)

On transfers of a primary residence or farm, the property would not be reassessed if the new owner also uses it as his or her primary residence or farm and the difference between the assessed value and market value does not exceed $ 1 million.

If the difference does exceed $ 1 million, the primary residence or farm will be reassessed according to a convoluted formula, according to the Legislative Analyst’s Office. It’s the assessed value just before the transfer, plus the market value at the time transfer, minus the sum of the assessed value plus $ 1 million.

For example, if a son inherits his father’s primary home that was assessed at $ 500,000 but is now worth $ 4 million, and the son moves into it within a year, the new assessed value would be $ 3 million, which is $ 500,000 plus $ 4 million minus the sum of $ 500,000 plus $ 1 million, the LAO says.

David Wolfe, a consultant for the Yes on 19 campaign, said he believes the new assessed value would be $ 2.5 million ($ 4 million in market value minus the sum of $ 1 million plus the dad’s assessed value of $ 500,000).

The $ 1 million amounts would be indexed for inflation.

If a parent left the home to more than one child, only one would have to move in to claim the tax break, Wolfe said. The proposition doesn’t say what would happen to the assessed value if one sibling bought out the others, he said.

Prop. 19 would have no impact on homes transferred between spouses; they are always exempt from reassessment.

The first part of Prop. 19 — expanding tax portability — would likely lead to more home sales, but reduce property taxes for local governments and schools, especially in counties that attract a lot of seniors, according to the LAO.

The second part — reining in parentchild exemptions — would likely increase home sales by encouraging children to sell inherited homes. It also would increase property taxes to schools and local governments as more homes are reassessed at market value, the LAO report said.

The net effect would probably be a tax increase. “In the first few years, local governments could gain tens of millions of dollars per year. Over time, these revenue gains could grow to a few hundred million dollars per year. Schools could receive similar property tax gains,” the report said.

In some years, the extra revenue going to schools would reduce what the state has to pay schools from the general fund. In those years, any money the state saves on school funding as a result of Prop. 19 would be allocated as follows: 75% would go into a new fire response fund, 15% would go into a fund to reimburse counties that lose money as result of Prop. 19, and the rest would go to the state general fund.

Also, if Prop. 19 encourages more seniors to sell their homes, and the sale of those homes result in more capital gains taxes being paid to the state, those new capital gains taxes would be allocated according to the same formula.

Cal Fire would get 20% of the fire fund and the rest would be divided among 500 historically underfunded county and rural fire departments.

More home sales would also increase real estate transfer taxes, which cities and counties would keep.

The Howard Jarvis group supported the Realtors’ 2018 ballot measure, but opposes Prop. 19 because “it’s just a very large, significant property tax increase which really disrupts the financial planning of a lot of California families,” Jon Coupal, its president, said. Also, “it’s very unclear who gets what.”

A report prepared by Capitol Matrix Consulting for the Yes on 19 campaign said it would generate significantly more tax revenue than what the LAO report predicted. The Capitol Matrix report assumes the portability provision would increase, not decrease, property tax revenue, because many homes that seniors sell will be reassessed at much higher market values. More importantly, the LAO underestimates the number of children who will be inheriting valuable properties they choose not to live in, said Brad Williams, one of the Capitol Matrix report authors.