Last fall, California voters narrowly approved Proposition 19, a new property tax break for older homeowners that will ease their tax burdens if they move.
At a time when real estate prices continue to soar at a breathtaking pace throughout the Golden State, Prop 19 allows residents 55 and older to blend the taxable value of their old home with the value of a new home. Even if they are downsizing, their new residence, perhaps including La Jolla real estate, will almost certainly be more expensive than the current home they purchased decades ago. That will allow them to save thousands of dollars a year on property taxes.
Proposition 19 Explained
The measure passed with 51% of the vote. Besides people over 55, it also affects the disabled and victims of natural disasters.
The California Association of Realtors was the principal supporter of Prop 19.
“Voters passed Proposition 19 because it is a win-win for California, providing needed housing and tax relief for seniors, wildfire victims, and generating much-needed revenue for schools, fire districts, cities, and counties as they face budget shortfalls due to the harmful economic impact of COVID-19,” Jeanne Radsick, president of the California Association of Realtors, told the Los Angeles Times after the measure passed.
One of the key parts of Prop 19 that certainly affects La Jolla real estate stipulates that children who inherit their parents’ houses will no longer receive a property tax break if they keep it as a second home or use it as a rental. A 2018 Los Angeles Times investigation found a large number of inherited homes along the coast that are used as investment properties.
Before Prop 19 passed, older homeowners had a one-time opportunity to stay at their existing tax level if they moved to a home of equal or lesser value within the same county or if they moved between San Diego and nine other counties. If they didn’t meet those requirements or moved to a more expensive home, they would have owed the full property tax assessment.
Under Prop 19, older homeowners can transfer their tax assessment up to three times if they purchase a more expensive home anywhere in the state. Homeowners with disabilities and victims of wildfires and other natural disasters are also able to take advantage of this tax break.
A Little History Lesson
The California Association of Realtors tried to address the issue of property taxes in the 2018 election, but its proposition was rejected. It came back two years later with Proposition 19, which helps to address California’s unique property tax system.
In 1978, Californians passed Proposition 13, which limited property taxes to 1% of a home’s taxable value, based on the year the house was purchased. Prop 13 limited how much a home’s taxable value can be increased every year, even if the market value increases at a faster rate.
Of course, property values have skyrocketed over the decades, including La Jolla real estate, which has made the property tax situation so critical. It has forced people to consider the ramifications of selling a property that they bought years ago and all of a sudden being faced with a property tax increase of possibly several thousands of dollars annually.
Who Benefits From Prop 19
Supporters of Prop 19 campaigned on behalf of empty-nesters and those wanting to move for health reasons so that they could buy new homes without absorbing a potentially crushing tax hit.
Although California has been ravaged by wildfires in recent years, an analysis by the California Budget and Policy Center found that homeowners affected by natural disasters make up less than 1% of those eligible for tax relief under the proposition. While the measure sets aside a certain amount of tax revenue for fighting wildfires, the state’s nonpartisan Legislative Analyst’s Office feels most of that money won’t be available until 2025 at the earliest.
The intended effect of Prop 19 was to get more movement in the housing market to try to address a shortage of inventory throughout the state. This includes La Jolla real estate.
"Eligible homeowners can now take advantage of the benefits that come from Prop 19, which will give them more flexibility if they choose to move to a home that better suits their needs, even if it's more expensive than their current home," Los Angeles County Assessor Jeffrey Prang said shortly before the law went into effect in April. "California has long struggled with a housing shortage, which has contributed to the high cost of housing statewide. Prop 19 works to partially address this shortage by removing the disincentive many seniors confront when they consider moving into a more manageable home. By allowing eligible homeowners to take their assessed value with them, we may start to see more movement in the housing market."
Prang explained it best when he added, "We can all agree that seniors shouldn't feel locked into homes that are simply not a good fit for them anymore. This component of Prop 19 is a welcome change."
The California Association of Realtors points out that seniors can continue to lead a comfortable life if they can maintain a stable tax basis when they sell one home and buy another, including La Jolla real estate.
Who Doesn’t Benefit From Prop 19
Those affected most by Prop 19 are children who inherit their parents’ home and keep it as a second home or as a rental. Prop 19 would eliminate the new property tax break for investment homes and commercial properties, forcing heirs to pay property taxes based on market value. Under certain exemptions, children can move into homes inherited from their parents and keep the property tax break. This could affect La Jolla’s real estate values.
Removing the tax break for inheritance property is expected to generate more than enough revenue to offset the loss in tax revenue from the relief offered to older homeowners.
Some people felt it was unfair to remove the property tax break for heirs. Before deciding to make a transaction, it makes sense to consult with an experienced real estate agent.
If you are ready to buy or sell La Jolla real estate, contact Kelly Macdonald for assistance.