By Pete Sabine
There are two main parts to the law and two major deadlines. New rules for transfers of inherited property will begin Feb. 16, 2021. New rules for taking a favorable assessment on a home purchase begin April 1, 2021 and the replacement home must be purchased within 2 years of the sale date.
The main provision of Prop 19 allows the owner of a primary residence who is 55 years of age or older, or severely disabled or who lost their home to wildfire disaster, to transfer the taxable value (its tax basis) of that residence to a replacement primary residence anywhere in the state. If you sell your home, with a taxable value of $100,000, and buy a new primary residence in California, you will be able to keep the benefit of that basis for your new home.
Prop 19 allows for the easier movement of a primary residence’s taxable value. The old law only allowed a basis to be moved between two counties if those counties opted into the law. Prop 19 on the other hand, allows for that movement “anywhere in this state.”
Additionally, contrary to prior law, Prop 19 allows a primary residence’s tax value to be moved three times as opposed to only once. So, if you are over 55 years old, it is easier to move and keep the tax benefit of their original home. The law provides that if the taxable value of a home is transferred to a replacement that is “of equal or lesser value,” then the taxable value of the replacement primary residence will be the same as the taxable value of the original. The basis of your original home gets transferred exactly to your new home.
If you transfer your basis to a replacement property that is of greater value, then the basis for your new home is calculated as follows: the taxable value (basis) of your original primary residence is increased by the difference between the cash value (sales price) of your original residence and the cash value (purchase price) of your replacement residence, and that new number becomes your replacement home’s basis.
As an example, if your current, original residence has a tax value of $100,000, but a cash value of $500,000, and you buy a replacement primary residence for $1 million, then the tax value (basis) for the new home will be $600,000 (the original tax value ($100,000) plus the difference in cash value between the two properties ($1 million minus $500,000). Even though there is a step up in basis that recognizes the increased value of my new home, it is kept down by using the basis of my original residence as a starting point.
While Prop 19 still covers the transfer of a family home between parents and their children, including through inheritance, the tax value can only be transferred if the property continues as the family home of the transferee.
If you inherit your parents’ property, you can only keep their tax basis if you continue to use that property as your primary residence. If you want to use the property as an investment, you will not get the benefit of the property’s original basis.
The reduction in tax income resulting from the easing of tax basis transfers for older homeowners has been offset by an increase in tax income from inherited investment properties.
Some will save money because of Prop 19 (homeowners over 55 who move within California), while others will pay more tax (children who inherit property for use as an investment). Please consult with your tax professional to understand your specific tax issues.
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