Winners and Losers of California Prop 19 Explained

On November 3, 2020, 51% of California voters approved Proposition 19, also known as The Home Protection for Seniors, Severely Disabled, Families, and Victims of Wildfire or Natural Disasters Act. It became effective as of December 16, 2020, but some elements will be rolled out slowly over the course of 2021. In this article, we’re going to go over how Prop 19 affects inherited land, how it is a boon for real estate agents, and ultimately who is better off with and without this legislation. First, let’s define what it does.

So what is Proposition 19, and why did people want it?

Proposition 19 in a nutshell

Making this part short and simple, California Prop 19 gives property tax breaks to senior homeowners and people who lost their homes to wildfires or other natural disasters and removes tax breaks for heirs of homeowners.

 

As a way to further understand Prop 19, let’s talk about Proposition 13, quickly. Passed in 1978, Prop 13 limited property tax to 1% of a home’s taxable value based on the year it was purchased. Even if the value of the house went up, Prop 13 limited the amount the property tax could go up. That effectively incentivized homeowners to stay where they were.

 

That means that a homeowner could be paying the property tax based on a home value that has since tripled or quadrupled, without their bill going up.

 

Heirs of these homeowners could also benefit, as the deflated property tax was inherited along with a property.

 

The problem that faced the elderly is that a budget that could afford the property tax of a deflated home would not be able to move to a new home as that new property would have current market value property tax. Prop 19 changes both the heir loophole and the property tax increase that would come with moving into a new house.

 

Here are the pros and cons of California Proposition 19.

Winners of Proposition 19

Elderly and natural disaster victims who want to move into new homes.

Using a base rule of thumb of property tax being 1.25% when including local taxes, let’s give an example of how elders are helped by Prop 19. Jill bought a house in 1975 for $250,000. Her property tax in 1975 and in 2020 would be $3,125, even though today that same house is valued at $800,000.

 

Before Prop 19, if Jill sold her 1975 house at market value and bought another one of the same value, $800,000, she would then pay $10,000 of property tax on the new house!

 

With Prop 19, Jill would only pay additional tax on the additional value of a house she was to buy. For instance, let’s say Jill decided to upgrade and buy a house worth $1 million, after selling her house at market value. Instead of paying the $12,500 tax the new home world normally calls for, Jill’s tax bill only increases based on the difference between the two homes, $200,000. Thus, her 2021 property tax bill would be $5,625 (based on her old tax bill of $3,125.)

Real Estate Agents

Proposition 19 was heavily backed by real estate agents, with $37 million in contributions coming from real estate organizations to communicate voting “yes” for Prop 19. The more people are moving homes, unafraid of larger property tax bills, the more business for real estate agents.

As for Matevosian Investment Group, we were never proponents of Proposition 19. Talking to our clients, this puts a big burden on their families if they decide to transfer property to their heir(s) or into a trust. Yes, prop 19 creates more selling of real estate property, but preserving costs also plays a huge role in the local market. Creates more lease opportunities and for us, that’s equally important.

Losers of Proposition 19

Heirs

The way California is paying for the loss of property tax revenue brought on by Prop 19 is to close a loophole opened by Prop 13. That is, the heir of a property with a deflated tax bill is now subject to pay property tax on the current day value of the inherited house. Prop 19 would close the loophole only for commercial property and investment homes, so if an heir decided to move into an inherited property, they could still make use of the tax break, theoretically. An investment home is one where it is determined the owner does not live in the property, and instead either rents it out or intends to sell it after its value goes up.

 

Clearly this is also another win for real estate agents or investment groups, as the heir is more likely to sell this inherited property rather than take on the increased property tax burden.

 

If you have any questions as to how Prop 19 will affect property held by your family, contact Matevosian Investment Group for more details. Learn how to protect yourself from this loophole closing, and plan for the future.