Proposition 19 – What Is It and How Does It Affect Multifamily?
In November of 2020, California residents voted to pass Proposition 19, an amendment to an already existing tax break that allows certain homeowners to transfer the tax basis from their current primary residence to a replacement home. The amendment affects seniors and natural disaster victims and, interestingly, has implications for prospective multifamily investors. In the article below, we’ll explain the tax advantages of Proposition 19 and how it applies to multifamily.
The New Tax Advantage Afforded by Proposition 19
Proposition 19 benefits homeowners who are 55+ years old or victims of wildfires and natural disasters in several ways:
Homeowners looking to transfer their tax basis can now purchase a replacement residence outside of their current county;
Proposition 19 extends this tax advantage to natural disaster and wildfire victims;
It also increases the number of times the qualified homeowner’s tax basis can be transferred from one to three;
And perhaps most importantly, it now allows the homeowner to purchase a primary residence that can be more valuable than their current residence.If the newly purchased home is valued higher than the original residence, then any value above that of the previous home is added to the transferred tax basis.
How does this new tax law work in practice? We have drawn what may be a common scenario of how property tax will be calculated the next time they are assessed in April of 2021 and for years onward:
How Proposition 19 Applies to Multifamily Investments and How We can Help
Proposition 19 provides an opportunity to increase passive income. Qualified individuals can transfer a prorated amount, up to $2 million in value, of their original home's tax basis to a 2-4 unit property that they intend to occupy. This is ideal for individuals who are looking to downsize their home and gain rental income. By preserving their original residence's lower tax basis, a qualified individual may be able to reduce their fixed expenses and increase their net operating income.
If you are a qualified individual and are looking for an opportunity to increase your passive income and grow your nest egg, we can help you identify a suitable multifamily investment to trade into. Trust in our combined 48 years of experience in commercial real estate to ensure that you make a sound investment decision.
Secondary Effects of Proposition 19 – Inherited Residences
Currently, testators have been able to transfer their primary residence to an heir without having the property’s value reassessed; they will need to be aware that, after February 16th, 2021, Proposition 19 will limit what qualifies for a property tax basis transfer to children and grandchildren:
The transferee must now use the inherited home as their primary residence;
The increase in the value of the home from its cost basis is now capped at $1,000,000 – any value after the first $1,000,000 is added to the inherited tax basis;
Exemptions from reassessment must be filed within a year, instead of three years.
Some of these new limitations may have adverse impacts on your estate planning – contact your lawyer to see how it affects you.
Disclaimer: The information provided is intended to provide general and summary information about Proposition 19. It is not intended to be a legal interpretation or official guidance, or relied upon for any purpose, but is instead a presentation of summary information. Proposition 19 is a constitutional amendment, so additional legislation, regulations, and statewide guidance are expected to clarify its implementation. Please visit the State Board of Equalization for more information on how property taxes are calculated. We encourage you to consult an attorney for advice on your specific situation.