What is Prop 19 and who are the winners and losers?

How California Prop 19 may affect your home.

A slim majority of California residents voted in favor of Proposition 19 on Election Day, green-lighting a motion that gives new property tax breaks to older homeowners while increasing property taxes for those inheriting their parents’ or grandparents’ properties.

The latter is a big deal for the roughly 650,000 Californians who, since 2010, have received a tax break allowing them to maintain their relatives’ low property taxes when they inherit the home. Now, heirs will pay market value in taxes.

On the flip side, the measure may also free up much-needed inventory in the state, as it protects senior homeowners who want to sell their current home and downsize, but have been afraid of much higher taxes. As reported by the Mercury News, Prop 19 also provides some tax benefits to severely disabled residents and homeowners who have had their property ruined by a natural disaster or other catastrophe.

Proposition 19 winners:

Anyone over 55 years of age, disabled, or victims of a wildfire or natural disaster will be able to transfer the assessed value of their California primary residence to a new home anywhere in California. They can do this three times in their lifetime, and they have two years to transfer their low property tax. If the new home is more expensive than their old one, their property taxes may rise, but not nearly as much as they would have before Prop 19.

The inclusion of wildfire victims in Prop 19 was smart. California was still in the midst of another horrific fire season while voters were considering the referendum, and it was heartbreaking to think that people could lose their homes and their ability to afford a new one overnight.

Prop 19 is a huge win for grandparents wanting to relocate from Sacramento to Laguna Beach to buy a home closer to their kids and for couples wanting to downsize or upgrade to their dream home for retirement. But it’s bad news for many other families:

Proposition 19 Losers

The ones who lose under Prop 19 are families wanting children (or qualifying grandchildren) to inherit their parents’ homes and continue to enjoy their low tax benefits.

Prop 19 severely limits these benefits for children who move into an inherited home and make it their primary residence. It eliminates Prop 13’s tax benefits altogether if they don’t move into the home, but choose to hold it as a vacation or rental property.

To illustrate, take the example of a Newport Beach home purchased by mom and dad in the 1970’s for $100,000. Today it’s worth $2 million, but its assessed value under Prop 13 is $200,000, so the parents pay only about $2,500 a year in property taxes, after including local assessments.

Under Prop 13, an unlimited “principal residence exclusion” allows a child to inherit the house along with its $200,000 assessed value and the low $2,500 tax bill. The 2% annual cap also means that property taxes will rise only about $50 a year going forward.

Prop 19 caps the “principal residence exclusion” at $1 million, which means, in our example of a $2 million home, that the additional $1 million of value will result in taxes of over $10,000 a year (after local assessments), with increases of about $200 a year going forward.

Paying taxes on only half the home’s value may sound like a good deal. But it could be a dealbreaker for many middle-class families, since the taxes will be added to other costs such as insurance, annual maintenance and possibly a mortgage required for the kids to own the family home.

If the kids decide not to move into the inherited home and make it their primary residence, the property taxes will jump even more. Taxes will be assessed on the full market value of $2 million, resulting in an annual tax bill of over $25,000, after including local assessments.

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