As we have written on extensively, Proposition 19, new for 2021 (replacing older propositions 58, 193, 60 and 90), has two main components, portability and inheritance. (Review our many articles on Prop 19 starting here, link to main prop 19 page.)
These two aspects can be combined in some regards, and not combined in others.
For example, if you inherit a property and qualify for Prop 19, and therefore keep that property’s low (prop 13) tax basis, you CAN then sell that property when you are 55 or older and transfer that same low (prop 13) tax basis to a new property. More details below.
However, for example, you CANNOT inherit and property and seek to transfer your existing property tax basis by selling your home when you are 55 or older and transferring to that new inherited property. (This is because the portability aspect requires the “purchase” of a new home, not inheritance). More details below.
SUMMARY OF THE TWO ASPECTS OF PROPOSITION 19
Inheritance Summary: Proposition 19 dramatically limits the ability to pass along the existing Proposition 13 property tax basis to a child or grandchild via gifting, inheritance or sale and is effectively a death tax or inheritance tax on the next generation. To benefit from the inheritance aspects of Prop 19 a new three part test must be met (if you do not meet all three requirements, there is no benefit, and the property will be reassessed to full fair market value): 1) the property must have been the parent’s (or child’s) primary residence at the time of the transfer or death; 2) The child (or parent) must then live in the property, and make it their primary residence, within one year of the transfer or death; 3) The benefit begins to taper out if the home’s fair market value at the time of transfer or death is greater than one million dollars ($1,000,000).
Portability Summary: Proposition 19 allows those 55 and older (or certain disaster victims) to sell your home and transfer your existing Proposition 13 property tax basis to a new home, in any California County, and for any price (i.e. a replacement home of a higher price, and you simply pay the difference). To benefit from the portability aspects of Prop 19 you must: 1) be 55 and older; 2) sell a property and purchase a property, both the property you sell and the property you purchase must be your primary residence (no second homes or investment properties); 3) purchase or newly construct the new residence within 2 years of sale of the old residence (this can be done in either order, i.e. sell then buy, or buy then sell).
EXAMPLES OF PROP 19 INTERPLAY
Inherit, transfer the old prop 13 basis; then sell and transfer the old prop 13 basis to your new home.
A unique opportunity arrises for those that inherit property and qualify for the Prop 19 inheritance rules. Once that inherited property is your primary residence, and once you are 55 and older, you now qualify to sell that property and transfer the property tax basis under the portability aspects of Proposition 19. Moreover, depending on how long you have lived at the property, and under current inheritance tax laws and the step up in basis, there could be minimal, if any, tax consequences.
Directly from the BOE website, Proposition 19 FAQ:
Q. I moved into my father’s home to help with his care. Upon his death on June 15, 2021, I inherited the home and qualified for the intergenerational transfer as a family home. The home is my primary residence. I am over age 55. Will I be able to sell this inherited home, buy another home, and transfer the tax base?
A. An inherited property may be considered an original home for purposes of the Proposition 19 base year value transfer, as long as you own and occupy the home as a principal residence either at the time of sale or within two years of the purchase or new construction of your replacement home. As long as all other requirements are met, you should be able to transfer the base year value of your inherited family home to a replacement home.
Inherit a new property, sell your current primary residence, then attempt to transfer your prop 13 basis to the property you inherited – Denied by County.
Given the definition of a purchase, an inherited property will not qualify for the portability aspects, i.e. you cannot sell a home and transfer that basis into a property you acquired by inheritance.
As noted, to benefit from the portability aspects of Prop 19 you must meet certain criteria, namely: 1) be 55 and older; 2) sell a property and purchase a property, both the property you sell and the property you purchase must be your primary residence (no second homes or investment properties); 3) purchase or newly construct the new residence within 2 years of sale of the old residence (this can be done in either order, i.e. sell then buy, or buy then sell).
However, an inheritance will not be considered a purchase, even if there is some partial buyout between siblings.
The BOE reasoning for this is clear, the BOE relies on CA Rev & Tax Code § 67 (2018) definition of “Purchased” or “purchase” which means a change in ownership for consideration.
Moreover, a sibling buyout will not qualify either (i.e. a partial inheritance and partial buy out), and there is a some additional guidance and examples found in BOE Letter to Assessors February 6, 2006, No. 2006/010 Correction.
From the BOE…
Q. Will the transfer of an original property or acquisition of a replacement dwelling by gift
or devise qualify for property tax relief under section 69.5? What about the exchange of
another property?
A. Section 69.5 requires that the original property be sold and a replacement dwelling
purchased or newly constructed. “Sale” is defined in section 69.5(g)(8) as “any change in
ownership of the original property for consideration.” “Purchase” is defined in section 67
as “a change in ownership for consideration.”
Change in ownership means that the transaction is not excluded from reassessment under
sections 62 through 68.
Consideration is something of value that is exchanged for the property. Consideration is
not limited to the payment of cash; it could include the exchange of other property, the
assumption of a debt, the cancellation of an outstanding debt, or the creation of a debt.
Further, neither statute requires that the consideration be equivalent to the market value
of the property transferred. While the transfer of property for nominal value should be
rejected on the theory that the alleged “purchase” is a sham, it would appear that the term
“purchase” could include a transfer for some substantial consideration even though the
amount was less than the full cash value of the property received.
Thus, something of value must be exchanged and a change in ownership must result in
order for property to qualify for relief under section 69.5. A property that is transferred
or acquired by gift or devise will not qualify because nothing of value was exchanged.
However, a property which is taken through foreclosure proceedings and sold to a third
party in a trustee’s sale would qualify as an original property since the consideration in
this circumstance would be the cancellation of an outstanding debt.
The transfer of the original property to a “straw man” in a transaction paralleling an
Internal Revenue Code section 1031 exchange, followed by the transfer of the beneficial
interest in the property to the buyer, constitutes a sale and change in ownership upon
buyer’s acquisition. Acquisition by the “straw man” (which may be a title company, a
bank, or a broker functioning as an accommodator) holding mere legal title to the
property does not result in a change in ownership. However, when the “straw man”
subsequently transfers title to a buyer who receives the present beneficial ownership of
the property, a change in ownership occurs. Thus, such a transaction would qualify as a
sale or purchase for section 69.5 purposes.
Q. Tim is the sole owner of a property which has a market value of $300,000. Anne (no relation to Tim) purchases a 50 percent interest in Tim’s property for $150,000. Anne sold her original property for $160,000 and appears to meet all other section 69.5 requirements. Anne files a claim to transfer the base year value of her original property to her 50 percent interest in Tim’s property. Is Anne’s partial interest purchase in Tim’s property eligible for property tax relief under section 69.5?
A. No. The purchase of a partial interest in a replacement dwelling under circumstances that result in only a partial change in ownership is not eligible for property tax relief under section 69.5. The definitions of original property and replacement dwelling evidence a legislative intent to apply section 69.5 to the entire interests in the original property and in the replacement dwelling (i.e., entire appraisal units) and not to just fractional interests therein.
Sell to a child, allow the child to claim the transfer tax benefit, then purchase a new property and also try and transfer the prior tax basis to the new property – Denied by County.
Q. Can a taxpayer sell an original property to the taxpayer’s child, allow the child to claim
the benefit of the parent/child exclusion and still qualify for the section 69.5 benefit when
taxpayer purchases a replacement property?
A. No. Section 69.5 provides that an original property must be subject to reappraisal at
full cash value at the time of sale unless it qualifies for one of the exclusions expressly
provided in sections 69, 69.3, or 69.5. The parent/child exclusion is implemented by
section 63.1. Under this exclusion, the property is not reassessed to current market value.
If the assessor grants a parent/child exclusion claim for the transfer of the original
property, then the base year value may not be transferred to a replacement dwelling.
Sell original property, purchase new property and add children on title – allowed by county.
This strategy could also be used in conjunction with adding the children on as joint tenants, thus creating a new original owner (link to BOE documentation on joint tenancies and original owner rules here) and potentially passing the property tax benefits to the children when the parents come off title via gift, sale or inheritance at death. If the new owners go on title as tenants in common, the original basis from the parent’s property can still transfer, but then the proportional ownership of the parents will be reassessed upon gift, sale or inheritance at death.
Q. A taxpayer was the sole owner of the original property, which was sold for $315,000.
The taxpayer and two other persons together purchase a replacement dwelling for
$300,000. If taxpayer is otherwise qualified, can the base year value be transferred under
section 69.5? Is it transferred to taxpayer’s one-third interest or to the entire property?
A. Yes. The base year value of the original property can be transferred to the replacement
dwelling if all the requirements are met. In this situation, the total full cash value of the
original property is compared with the total full cash value of the replacement dwelling
regardless of the fact that the qualified claimant owns only a one-third interest in the
replacement dwelling. As long as the claimant is otherwise qualified, the replacement
dwelling may receive the benefits of section 69.5 regardless of the number of co-owners
of record there are on the replacement dwelling. However, only the claimant and the
claimant’s spouse are considered “claimants” and use their one-time benefit. Even though
the other non-spouse co-owners will benefit from the claimant’s use of section 69.5, they
are not considered claimants and will still be able to utilize the benefit for future
transactions.
Sources:
https://www.boe.ca.gov/prop19/#FAQs
https://www.boe.ca.gov/proptaxes/pdf/200_0010.pdf
CA Rev & Tax Code § 67 (2018)
BOE Letter to Assessors February 6, 2006, No. 2006/010 Correction.
– Devin Lucas
Author Devin R. Lucas is a Real Estate Attorney, Broker and REALTOR®, specializing in Newport Beach, Costa Mesa and Orange County coastal communities, serving individual and investors in residential real estate.
Lucas Real Estate – Attorney Devin Lucas and CPA Courtney Lucas – are experts in California intra family transfers using all aspects of Propositions 13, 58, 193, 60, 90 and new Proposition 19. Learn more about how Lucas Real Estate may help your family transfer by clicking here.
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