March 2, 2021
By Paul Miloe, Financial Advisor
*Updated* – Over 55 and Entering Escrow in California – Be Wary of Prop 19
While the portion of Prop 19 covering family transfers became effective Feb. 15th, the portion that allows a value transfer on a principal residence for anyone age 55+ (or disabled), becomes effective on April 1st. If you’re looking to purchase a new primary residence, caution is warranted as closing escrow prior to April 1st could have unintended tax consequences. If the property being purchased is valued at or above the value of a primary residence owned by the buyer that was sold within the past 2 years, it is crucial to seek qualified advice from a tax-professional or attorney familiar with the nuances of Prop 19 prior to committing to the escrow.
Through March 31st, buyers over 55 can transfer the assessed value on a principal residence sold within the past 2 years to one of equal or lesser value so long as it is in the same county or one of ten counties that permit transfers from another county. Under the existing law, value can only be transferred once (or twice if the 1st transfer was based on age and the 2nd transfer was based on disability). If qualified, there are limits set on the value of the new property ranging from 100-110% of the old property, and these hinge on the timing of the new purchase relative to the sale.
Effective April 1st, Prop 19 will replace the current law. First, this portion of Prop 19 allows the assessed value to be transferred anywhere in CA (no limitations on county). Next, value can be transferred on a principal residence up to three times (vs. once). Finally, the transfer can be done on a property of any value, but the amount above 100% is added to the transfer value.
To see how this works, consider this example. Assuming the current property has a tax basis of $250,000 and is sold for $500,000, and the new residence is purchased for $700,000 (on or after April 1st), then the assessed value on new property will be $450,000 (vs. $700,000). This is calculated by taking the difference between the assessed value of the new residence ($700,000) and subtracting the value of the residence being sold/sold within past 2 years ($500,000). In this example, that differential is $200,000, and that is then added to the prior tax basis ($250,000) to determine the assessed value of the new property ($450,000).
If a buyer closes escrow on the new residence prior to April 1st, then the old laws will apply and that could result in a higher assessment (or full assessment) on the new property! If you’re looking to buy or set to make an offer soon, be sure to do a thorough calculation to see if closing escrow after April 1st could save on the taxes due on the assessed value of the new home.
For a comprehensive review of your personal situation, always consult with your legal or tax advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.