California’s Property Tax Haven Status Is Under Threat With Prop 19
California has a unique situation with property taxes. The state is currently operating as a property tax haven, but this may change thanks to Prop 19, which will be on the ballot in November.
Prop 13 and the Current Property Tax Structure
In 1978, California voters approved Proposition 13. This led to a significant debate regarding property taxes across the country, yet it has not changed. The proposition meant that the base-year value was set to 1975. From there, the property taxes were just 1 percent of the assessed value, and they could not increase by more than 2 percent every year.
Over the years, there have been some attempts to overturn Prop 13, but none have succeeded. Prop 13 originally received approval for sound reasons. Essentially, the property values increased incredibly quickly during the 1970s, to the point that people could not afford to pay their property taxes. By keeping property taxes low, Prop 13 let people keep their houses.
The result is what is now commonly considered to be a property tax haven throughout the state of California.
How Prop 19 Could Change It
Proposition 19 is the latest attempt to overcome Proposition 13, but it would not altogether remove it. Instead, it would change the parent-child exclusions that are in Prop 13.
The Current Exclusions
The original Prop 13 has a principal residence exclusion. This lets parents transfer their principal residence to their children, regardless of its value, without leading to a reassessment. It also includes a lifetime exclusion for non-principal residences, including rental properties, commercial properties, and second homes. This exclusion only applies to transfers between children and parents and is $1 million per person or $2 million for a married couple.
The Exclusions in Prop 19
If Proposition 19 gets approval from voters, it will change two elements of these exclusions. The non-principal residence exclusion would disappear completely. For the principal residence exclusion, Prop 19 will add two conditions. First, the exclusion would only apply to $1 million in assessed value. Additionally, the child would have to use the property as their principal residence.
The result would be that children who receive property from their parents would likely have to have the property’s value reassessed, at least in many situations. Given the low assessments of Prop 13, this would lead to an increased assessment value in most cases, resulting in paying more property taxes.
Predictions
Even with the November election fast approaching, experts are still unsure whether Proposition 19 will pass. There is typically strong opposition to ballot measures that are not well understood, which can very well be the case for this Prop 19. The last time a similar measure was on the ballot, voters rejected it by a significant margin, double digits.
Additionally, there is the fact that taxpayers tend not to vote for measures that would increase their taxes, which this one would do. However, the naming of the ballot and its overall packaging could make it appealing to some voters.
Older voters, those about 55 years old, may also favor the proposition as it includes a measure that lets seniors move into a new home that has a larger value yet pay their current property taxes. This is currently allowed once in their lifetime, but Proposition 19 would expand it to three times. It would also eliminate the current county restrictions for that movement.
Other Consequences
Experts also caution California residents who own property or will get property from their parents to consider the future. This ballot measure could stop California from being as much as a property tax haven as it is. Simultaneously, the presidential election’s results may lead to a significant decrease in exclusions for estate and gift taxes, both of which are currently at all-time highs.
Sources:
https://www.accountingtoday.com/news/new-proposition-threatens-californias-real-property-tax-haven
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