A slim majority of California residents voted in favor of Proposition 19 on Election Day, green-lighting a motion that gives new property tax breaks to older homeowners while increasing property taxes for those inheriting their parents’ or grandparents’ properties.
The latter is a big deal for the roughly 650,000 Californians who, since 2010, have received a tax break allowing them to maintain their relatives’ low property taxes when they inherit the home. Now, heirs will pay market value in taxes.
On the flip side, the measure may also free up much-needed inventory in the state, as it protects senior homeowners who want to sell their current home and downsize, but have been afraid of much higher taxes. As reported by the Mercury News, Prop 19 also provides some tax benefits to severely disabled residents and homeowners who have had their property ruined by a natural disaster or other catastrophe.
The measure, which was supported by the California Association of Realtors (to the tune of $35.7 million), the National Association of Realtors and California Professional Firefighters, will add up to $2 billion annually to California’s coffers, per data gathered by Yeson19.vote, a pro-Prop 19 website.
“Prop 19 will deliver needed funding for cities, counties, and school districts when they need it most,” according to the site. “It will generate hundreds of millions in annual revenue for fire protection, affordable housing, homeless programs, safe drinking water, and other local services and dedicated revenue for fire districts in rural and urban communities to fix inequities that threaten life-saving response times to wildfires and medical emergencies.”
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What does the passage of Prop 19 mean for the general housing market in one of the nation’s more expensive states to live in? Although the state itself will experience a windfall, residents who live in inherited homes may find living in California increasingly unaffordable.
“We’re definitely going to see property taxes rise on those inherited homes,” said Nick Solis, president of One80 Reality and a California real estate leader. “California is one of those places where blue collar workers usually pass down homes to kids and other family members. Those homes are now going to be taxed at a much higher rate. It will force their hands to sell, because the properties will be more expensive to retain.”
Solis said he’s not worried about selling homes, but a new demographic of homebuyers is going to emerge.
“Not all who receive inherited homes come from money,” he said. “Many blue collar workers and families bought in previous decades when homes were affordable, and are passing them down to their kids. They will see a tax increase. We’re going to see a different demographic. We were already seeing a major push of people who were blue collar, that could afford a home in places like the Bay area, they are moving into the central valley or other affordable places because they just feel too uncomfortable living in their current homes. And now taxes are going to be even higher on the inherited homes.”
Monique Bryher, a broker-associate and realtor in California pointed out that, with the higher property taxes, keeping inherited homes as rental properties may become unprofitable.
“Estate-planning attorneys are going to be very busy, as this new law may cause many people to decide to sell properties that they intended to pass on to their heirs,” she said.
Millennials and other young generations are sure to be affected as well, Solis said. For one, college-aged kids in California may choose to leave the state and not return, a change from past years where the state was a hotbed for younger homeowners. Now, those same adults are looking for the most affordable place to live following college – even if it means leaving the state altogether.
“It’s a game-changer,” Bryher said. “Both in terms of properties being sold that would have been passed on through a family trust, or by the beneficiaries who decide they either can’t afford to pay property taxes based on a current assessed value, or just don’t want to pay the higher property taxes. The state’s going to make a lot of money.”
Higher property taxes or not, California will always have appeal.
“People are always going to want to live in California, but I can see life getting more expensive here a lot faster than I expected,” Solis said.
I thought the inheriting kids got to keep the lower tax basis if they make the property their primary residence?