By Stuart R. Simone
“PORTABILITY” is not a word that gets pulses racing and hearts a-fluttering. But if you are a homeowner over the age of 55 (or victim of natural disaster) then Portability might just be huge for you as of April 1, 2021. One of the greatest and most unique advantages of owning a home in California is that thanks to Proposition 13, your property taxes cannot be raised more than 3% per year. That’s because the “tax basis” remains the same until the original owner sells the home. But even better, the basis remains the same if the owner(s) pass the home on to their children or grandchildren.
Due to the Covid lockdown and other factors, many Californian homeowners are moving out of state. If you’re thinking of moving, Proposition 19 gives you financial incentives to remain in the state.
Now with the passage of Proposition 19 last November, a homeowner who is over 55 years of age, severely disabled or whose home has been substantially damaged by wildfire or natural disaster may transfer the taxable value of their primary residence to:
- A replacement primary residence
- Anywhere in the state
- Regardless of the value of the replacement primary residence (with adjustments if “greater” in value)
- Within two years of the sale
- Up to three times (but without limitation for those whose houses were destroyed by fire).
What Does “Extended Portability” Mean?
As of April 1, 2021, Proposition 19’s laws will supersede the more limited old “Portability” rules.
First, it allows a seller of a principal residence to transfer the tax basis of that principal residence to the purchase of a replacement principal residence anywhere in the State of California. Under prior law, the seller was limited to transfers either within the same county (under Proposition 60) or between a limited number of counties that specifically permitted such taxable value transfers (under Proposition 90).
Second, Proposition 19 permits such transfers up to three times (but unlimited for those whose homes were destroyed or substantially damaged by fire). Prior law allowed such transfers only one time.
And third, Proposition allows the transfer of the tax basis of the sold principal residence to the replacement principal residence regardless of value with certain adjustments to the tax basis if the replacement principal property is of “greater value” than the sold principal residence. Under prior law, only transfers of “equal or lesser value” were eligible for the exemption.
Here’s where you need to do a little math. Subject to implementing legislation, Proposition 19 has two provisions regarding the value of a replacement principal residence. Assuming the definitions follow the previous statute, here are the gory details:
(1) Equal or Lesser Value: If the replacement primary residence is of equal or lesser value, subject to an inflation index of 105% if purchased within one year of sale, and 110% if purchased within the second year of sale of the original property, then the tax basis of the original principal residence may transfer to the replacement principal residence unchanged.
(2) Greater Value: If the replacement residence is of greater value (taking inflation into account), then the taxable value of the replacement primary residence is calculated by adding the difference between the full cash value of the original primary residence and the full cash value of the replacement primary residence to the taxable value of the original primary residence.
55 Is Just A Number
OK now that we made it through the math portion of this, let’s get nerdy with the English. Proposition 19 states that it applies to persons who are over 55 years of age, but Revenue and Taxation Code Sec. 69.5 defines this to include those who are 55 years of age or older. It is the R&T Code definition that will likely determine eligibility, which matters greatly to you 55 year olds.
While there is no definition of “severely disabled” within Proposition 19, the meaning of this phrase is likely the same as the definition supplied by the California Revenue and Tax Code. “Any person who has a physical disability or impairment, whether from birth or by reason of accident or disease, that results in a functional limitation as to employment or substantially limits one or more major life activities of that person” is severely disabled per R&T Code Sec. 74.3.
Now here’s a question I hear a Real Estate Investor asking: Can a replacement property be purchased prior to the original primary residence being sold? The answer is yes. This is how the current rule under Proposition 60 operates, and Proposition 19 uses nearly identical language.
Intergenerational transfers – Keeping It in the Family
Note that Proposition 19 also makes some changes to the exception for reassessment that I mentioned above from parents to children or grandchildren, making the rules a little stricter. There is still an exception, but now the property must continue to be used as a Family Home (primary residence) and the transferee must claim the homeowner exemption within one year of the transfer. Also, if the property value at the time of transfer is more than $1M over the original tax basis then there will be some upward adjustments made. In this case, the new tax basis will be the value of the property at the time of transfer minus $1M.
Intergenerational transfers previously exempted not only the transfer of the tax basis of a primary residence but also up to $1 million dollars of all other real property, but that $1 million addition exemption is gone. These intergenerational rule changes became effective on February 16th.