By: Henry VanBuskirk, CFP®, Wealth Manager

One of the greatest and most time-consuming decisions that a person can make during their lifetime is choosing when and where to move to. For many seniors, this move is done right after they retire, which only heightens the importance of that decision. The goals of moving may be to be closer to family, to downsize, or you just simply liking the area that you want to move to better than the area you live in now. If you are in the state of California, it is important to pay special attention to where you are moving to and if the area is subject to natural disasters like wildfires because some insurers like State Farm and Allstate aren’t taking on new homeowner’s insurance policies. Apparently, Californians aren’t “In Good Hands” anymore with Allstate, and “Like an Elusive Neighbor, State Farm isn’t there” (for Californians).

But all kidding aside, moving does have its benefits and Proposition 19 (Prop 19) was a “godsend” for homeowners across California to transfer their existing, lower property taxes to a new primary residence.

Prop 19 was approved by voters in November 2020 and signed into law in February 2021 and does two main things:

1. It allows for seniors over age 55, severely disabled persons, or victims of wildfires or other natural disasters to transfer their property taxes from their old home to a new home in California, as long as that new home will be considered a replacement of your primary residence.
2. It updates the transfer rules for parents (or grandparents) on the principal residence to children (or grandchildren) to transfer their family home and continue to be deemed a family home so that the child (or grandchild) can continue to enjoy the original property tax value and not have the taxable value of the home reassessed. There are special rules for this exemption:
   1. The child must live in the primary residence and the value of the home is limited to the current taxable value plus $1,000,000 (adjusted every 2 years);
   1. The grandparent must be deceased on the date of transfer if transferring to a grandchild.

For seniors that are affected by wildfires or other natural disasters, Prop 19 offers the additional benefit of being able to transfer the original property tax basis an unlimited amount of times as long as the replacement property is of equal or lesser value in the state of California. If a home of greater value is purchased, then the new property will be reassessed, and the property tax will be adjusted upward. However, this property tax increase is less than it would have been without Prop 19. So far, 23,087 homeowners who have met this qualification have cashed in on this property tax advantage, according to data provided by the state Board of Equalization.

There are a few items to be cognizant of when adjusting to the new Prop 19 rules. Careful consideration must be made for persons that are planning for generational wealth. I would like to illustrate how by walking through a client scenario we’ve helped utilize Prop 19 to keep the low original tax basis of her mother’s home that she was set to inherit.

Example:

Mr. and Mrs. Example (both age 60) live in their primary residence in Ventura County, which is worth $700,000. Mrs. Example’s mother, Mrs. Sample (age 90), lives in Los Angeles County in her primary residence worth $1,200,000. Mrs. Sample’s home was purchased in 1970 for $100,000 and has a property tax of $780 per year. Both homes in this scenario have no mortgage or other debt. Mr. and Mrs. Example’s property tax for their Ventura County home that they purchased for $600,000 in 2015 is $4,680 per year. Mrs. Sample is not in good health and Mr. and Mrs. Example decide to move into Mrs. Sample’s home to help care for her. Since Mr. and Mrs. Example understand this move is temporary, they decide to keep their Ventura County home and make the Los Angeles County home their primary residence.

One year later and Mrs. Sample passed away. Mr. and Mrs. Example through Prop 19 inherit the Los Angeles County home and are able to keep paying the low property tax of $780 per year on it. *

*Note: A new homeowner’s exemption to maintain that tax assessment must be filed within one year from the date of death. The child (or children) who will be living in the home also must file a claim for reassessment exclusion between parent (or grandparent who survives the parent) within three years (date of death) of the last surviving parents or grandparents passing.

Then Mr. and Mrs. Example decided to sell both their Ventura County property (now considered a secondary residence) and their Los Angeles County home (now considered their primary residence) to purchase a $1,100,000 home in Orange County.

The Ventura County home’s value at the time of sale was $700,000 and the Los Angeles County home’s value at the time of sale was $1,200,000. Since the Los Angeles County home was received as an inheritance, the new cost basis of the home is $1,200,000 and no tax was due when the home was sold. The Ventura County home was sold for $700,000 and originally purchased for $600,000, so there will be long-term capital gains of $100,000. The total tax bill for the Ventura County home is as follows:

• Adjusted Gross Income: $200,000
• Federal tax due from home sale: $15,000
• State tax due from home sale: $9,300
• Total tax from home sale: $21,053

While Mr. and Mrs. Example felt the brunt of the $21,053 tax bill as they were moving into their new $1,100,000 home in Orange County, they immediately noticed the benefit of continuing to pay the low original property tax basis from 1970 on Mrs. Example’s mother’s home of $780/yr. If they didn’t go through this exercise of taking advantage of Prop 19, the property tax on their Orange County home would have been $8,580/yr. By going through all of the hullabaloos explained above, they will be saving $7,797 per year (or $649.75 per month) for as long as they continue to live in the Orange County home or relocate from their Orange County home to a home of equal or lesser value at the time of sale.

Conclusion:

We’ve highlighted how Prop 19 can be advantageous to seniors over age 55, severely disabled persons, or persons affected by wildfires or other natural disasters. Relocation planning is one of our firm’s hallmark services we provide, and we can help you navigate the ins and outs of state laws to help you reach your long-term financial goals. If you’ve got your relocation plan in motion, need a second pair of eyes before you start your move, or if this article has left you with more questions than answers, we are happy to help financially guide you along your journey. Hopefully, we’ve illustrated how diligent comprehensive financial planning can help benefit you in the long run. If you have questions or would like to learn how to start a comprehensive financial plan with us, email us at financialplanning@bfsg.com or call us at 714-282-1566. Thank you. 

Sources:

1. https://www.businessinsider.com/state-farm-cuts-new-home-insurance-california-citing-wildfire-risk-2023-5
2. https://boe.ca.gov/prop19/#Introduction
3. https://calmatters.org/housing/2023/05/state-farm-california-insurance/
4. https://www.businessinsider.com/state-farm-cuts-new-home-insurance-california-citing-wildfire-risk-2023-5

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