California's Proposition 19 (Prop 19) took full effect on April 1, 2021. Although some provisions were already in place as of February 16, 2021, many homeowners were left scrambling to figure out how the new legislation would impact them, their homes, and their children or grandchildren.

The new law's primary focus is property tax portability. It allows homeowners 55 years of age or older, homeowners suffering from severe disabilities, or those homeowners who've fallen victim to natural disasters—primarily wildfires—the ability to transfer the tax assessments on their current home to a replacement residence.

Prop 19 also impacts how homeowners can manage intergenerational transfers. The law limits the transfers to primary residences to a child (or grandchild if parents are deceased) as long as the child or grandchild utilizes that primary residence as a family home.

If the difference between the taxable value and actual value is too great, then the transferred property will be subject to a new taxable value.

The latter change effectively closes a loophole in Calfornia's inheritance laws, allowing parents or grandparents to pass on property to their immediate descendants without fear of the property facing a tax reassessment.

Besides adding much-needed housing to an already squeezed real estate market and providing additional funding for local governments and schools, additional proceeds gained from the changes to the generational inheritance will go into a dedicated fund for the state and local entities to battle wildfires.

The basics of Prop 19 are straightforward. However, as we are still in its earliest days of being enacted, it's worth learning how Prop 19 helps Santa Barbara homeowners.

For Santa Barbara Homeowners 55 and Older

As Prop 19 relates to property tax portability, the changes aim to lift a heavy burden from homeowners age 55 or older. At its most basic level, Prop 19 is a tax savings program for those aging homeowners who find themselves in a current living situation that has become unmanageable.

Targeted specifically to retirees and seniors, Prop 19 moves to unburden older homeowners from the stresses of managing a home that may now prove too much for them to handle.

Individuals can relocate to properties that are easier for them to care for without facing a tax penalty. Additionally, those homeowners can also choose to move closer to family or areas where medical facilities and treatment are more accessible.

The primary stipulation being the move must occur within the state of California.

The removal of location or price restrictions by allowing residents to take their tax base with them will lend older homeowners more flexibility in managing their needs and lifestyle.

For Santa Barbara Homeowners Suffering from Severe Disabilities

Prop 19 works similarly for those area homeowners who live with severe disabilities. To better accommodate their changing lifestyle needs, an individual can seek a replacement home without facing a heavy tax penalty.

Any individual who qualifies can take advantage of Prop 19's new tax portability up to three times.

For Santa Barbara Homeowners Impacted by Wildfires

Prop 19 rules also extend to homeowners who've fallen victim to natural disasters—more specifically, wildfires.

Prop 19 is designed to counter the problem of individuals or families having to face huge tax burdens in the shadow of a recent disaster.

Prop 19 lets this group of homeowners transfer the tax base of a damaged home to a replacement property.

Again, the new property must be within the state of California.

In targeting these three groups specifically, Prop 19 aims to alleviate tax burdens from groups who can least afford them.

Prop 19, though, also serves as an indirect benefit to another group—potential homebuyers. By allowing seniors and those with severe disabilities to relocate to homes better suited to their lifestyle without a hefty tax penalty, there is the potential to bring thousands of homes to a market desperately seeking greater inventory.

Ultimately, it stands to benefit first-time buyers and young or expanding families, and those seeking investment opportunities.

The Finer Points of Prop 19 Replacement Homes

As it relates to replacement homes, it's essential to read the fine print on Prop 19. While the law assumes a replacement home's value will most often be less than an individual's current home, this may not always be the case. There are scenarios where the replacement residence value may equal or exceed that of the existing house.

To address and better explain these exceptions, we've included two examples courtesy of the California Association of Realtors to better illustrate the scenarios in both instances:

Example 1: A senior couple on a fixed income lives in a home valued at $600,000. They pay $2,200 in property taxes (based on the $200,000 original purchase price). They find a $600,000 home to purchase near family in another county but can't afford the new $6,600 annual property tax bill that comes with moving—it could cost $4,400 more in annual property taxes to move.

Under Proposition 19: The senior couple can purchase the $600,000 home in another county without a property tax increase. Prop 19 allows these homeowners to transfer the tax base of their original home to the replacement home, saving $4,400 in annual property taxes.

Example 2: Another senior couple with a home valued at $600,000 (also paying $2,200 in property taxes) wants to downsize from the two-story home that is too big for their needs, is too expensive to maintain, and has stairs that are difficult for them to use. They want to downsize to a more manageable home in a newly-built retirement community nearby for $700,000, but they can't afford the $7,700 spike in property taxes that comes with moving.

Under Proposition 19: This couple will save $4,400 in annual property taxes. Prop 19 allows homeowners to keep their existing Prop 13 tax base and transfer it to a more expensive home. The property tax base of the new home is determined by adding the difference between the sales price of the replacement home ($700,000) and the original home ($600,000) to the tax base of the original home ($200,000). In this example, the couple would pay $3,300* in property taxes instead of $7,700 in property taxes. (*The tax savings could be more significant depending on the definition of "equal or lesser" value.)

Prop 19's Intergenerational Transfer Rules

Beyond assisting those specific groups who can no longer manage current homes given their lifestyle needs, Prop 19 also addresses the rules surrounding generational transfers.

The law continues to protect these property transfers, as outlined in the California State Constitution, though it does modify them.

Foremost, property transfers from parents to their children without property tax increases are still allowed. (This also extends to grandparents transferring property to their grandchildren, should the parents of the grandchildren be deceased.)

Prop 19 does alter those transfer rules.

Now, only a primary residence is eligible for the tax exemption as long as the child or grandchild continues to use that primary residence as a family home.

Prop 19 also accounts for properties where there's a large disparity between the taxable and actual value of the home. Properties priced at $1 million or more when the transfer occurs could see increased tax adjustments. Less than $1 million, the tax remains the same.

To add further clarification, here a two transfer examples courtesy of the California Association of Realtors:

Example 1 for Intergenerational Transfers: If the original tax basis was $500,000, and at the time of transfer, the property is valued at $1.2 M, then the tax basis will remain at $500,000. This is because $1.2M is not more than $1M over the original taxable basis.

Example 2 for Intergenerational Transfers: If the original tax basis was $500,000, and at the time of transfer, the property is valued at $2M, then the new taxable value will be $1,000,000 ($2M minus $1M). This formula applies because the value of the property at the time of transfer was more than $1M over the taxable basis.

Prop 19 also includes family farms—defined as real property under cultivation, used for agricultural commodities or grazing and pasture. The farms, however, are not required to be utilized as the primary residence by either party in the transfer.

Additional Value for Santa Barbara Homeowners

Perhaps the most underappreciated aspect of Prop 19 is its aim to help cities and towns and their citizens in the effort to combat wildfires.

Proceeds generated by Prop 19—in addition to the added tax revenues local municipalities stand to gain—will go into a dedicated wildfire fund.

The California Fire Response Fund, which cannot be raided beyond its primary purpose, is set aside for California fire response and protection throughout the state. This includes Santa Barbara and its surrounding communities, which have all seen their fair share of deviation from past fires. Estimates show the fund increasing to over $6 billion by year 12.

When it comes to navigating Prop 19, every situation may have its nuances, including yours. Should you have any specific concerns or questions on how to take advantage of Prop 19 or how it may impact any current property you own, you should consult your tax professional.

Ready to explore the best of Santa Barbara real estate? Contact Chris Palme today to start your home buying or selling journey. From Rivera real estate to Montecito homes for sale, allow Chris's years of experience and expertise be your guide to the American Riviera luxury real estate market.