An In Depth Look at Prop 19 (part 2)

 PROP. 19 RULES APPLY 

ON AND AFTER APRIL 1, 2021  

Proposition 19 would allow transfer of tax basis where either the sale of a primary residence takes place before April 1, 2021, as long as the subsequent purchase takes place within two years and on or after April 1, 2021.

🏠 Alternatively, a conservative interpretation could require that both the sale and purchase must occur on or after April 1, 2021.

🏠 The Bottom Line: As always, is to talk with your legal or tax advisors — especially on an issue that is so consequential and new.

 

CALCULATING THE TAX BASIS 

OF THE NEW PROPERTY UNDER PROP 19 

How to determine the tax basis of the new property?

 

Rule 1: If the replacement property is of equal or lesser value to the original primary residence, then the taxable value of the replacement property remains the same as that of the original primary residence.

Rule 2: If the replacement property is of greater value than the taxable value of the replacement property will be adjusted by adding the difference in sales price (technically, the “full cash value”) to the taxable value of the original primary residence.

 

Here is a sample calculation of the tax basis for a replacement property with a greater value than the original primary residence.

🏠  Original primary residence taxable value $400,000

🏠 Original primary residence sold for $900,000

🏠 Replacement primary residence purchase $1,000,000

🏠 Difference between sale price of original primary residence and purchase price of replacement primary residence is $100,000

🏠 Taxable value of replacement primary residence is $400,000 plus $100,000 $500,000

 

THEN THERE ARE THE NEW RULES ON TRANSFER OF PROPERTY TO CHILDREN AND GRANDCHILDREN

New Intergenerational Transfer Rules — that is, transfers of the property tax basis to

children and grandchildren. Previously, the following property transfers were exempt from reassessment:

✔ The principal residence, regardless of its value or use.

✔ All other property up to $1M in value.

 

Now under Prop 19, a property is only exempt from reassessment if all three conditions below are met:

✔ The property “continues as the family home of the transferee,” or if it’s a family farm.

✔ The property is being transferred from a parent to child or grandparent to grandchild.

✔ The transfer is completed within one year.

**This component of Prop 19 went into effect on February 16, 2021**

 

HOW MUCH WILL THE 

NEW TAXABLE VALUE BE?

General Rule:

🌟 If a child or grandchild qualifies by continuing to use the home as a primary residence, then the original Taxable Value (TV) of the property for that child/grandchild will remain the same as the TV to the parent, unless the following applies:

Exception:

🌟 If the assessed value of family home is more than $1m over the original TV, then the new TV will increase.

For example:

💰 Assume the assessed value of the family home is $2m and the original TV is $500k.

💰 Because $2m is more than $1m above the original TV, the new TV will increase.

💰 If so, the new TV will be the new assessed value minus $1 m.

In this case, $2m minus $1m equals $1m, and that is the new TV.