In November, California voters approved Proposition 19, the Property Tax Transfers, Exemptions, and Revenue for Wildfire Agencies and Counties Amendment (2020) to take effect April 1, 2021. Presumably, they did so because they believed disadvantaged homeowners should be able to transfer their tax base when they purchase a new primary residence—like those who are disabled, those who are older than 55, and wildfire victims. Especially around here where so many people have had to replace a home destroyed by wildfire, I can see why this was an attractive idea. Unfortunately, the proposition’s fine print came with some serious downsides.
Before we dig into the details, let me provide a little history on property taxes in California.
Before 1978, local governments used property taxes to balance their budgets without any meaningful restraints on spending. California counties estimated their expenses for the year. They then deducted anticipated revenues, and whatever was left over (budget shortfall) was divided by the assessed value of all the properties in the county. Property owners got fed up with ever-increasing property taxes and in 1978, passed Proposition 13, which limited property tax increases to 2 percent a year (with a few minor exceptions).
I am not in favor of Proposition 13 because it is unfair. There is no reason my neighbor and I should pay different tax rates when we benefit from the same government-funded services, simply because one of us happened to purchase our home twenty years earlier. Without Prop. 13, property tax rates could be evened out among all property owners. This could be done in a revenue-neutral way where the property owner of 20 years would see an increase and the new property owner would see a decrease. Sadly, suggesting the repeal of Prop. 13 would likely be political suicide for any elected official.
So, how does all this relate to the recently passed Prop. 19? The headlines on Prop. 19 touted a solution for those on a fixed income (or otherwise disadvantaged) who felt trapped—unable to move because the property taxes on their new home would be prohibitively high. To give you an example, I own a single-family home that I purchased in 1973, for which I pay annual property taxes of about $500. The homeowner next door with the same basic house pays about $3,500 per year. If I were to sell my property and buy a similar house in the neighborhood, my annual taxes would go up by $3,000, so even if I preferred a different house, I wouldn’t move. Allowing people to take their tax base with them is one way to solve the problem, though not the solution I would have chosen (I’d have replaced Prop. 13 with a more equitable solution).
The real problem is Prop. 19’s fine print: what happens when people inherit property. Under Prop. 19, when parents transfer ownership of their property to their children, the assessed value of that property is updated to reflect market value. Imagine that you bought your first home 45 years ago, a little two-bedroom, one-bathroom starter home. As your family grew, you purchased a bigger home, but rather than selling your first home, you were able to hold on to it as a rental. This rental income could be a significant source of income for your family and though you’d like to give the property to your children, doing so would dramatically reduce its worth because of the new (higher) property tax.
Prop. 19 has passed and the only way to undo it is through a new proposition. I am sorry for those families who were hoping to provide their children with a bigger financial boost as they passed on the properties they worked so hard to acquire.
If you have questions about property management or real estate, please contact me at email@example.com or call (707) 462-4000. If you have an idea for a future column, share it with me and if I use it, I’ll send you a $25 gift certificate to Schat’s Bakery.
Dick Selzer is a real estate broker who has been in the business for more than 45 years.