2020 Ballot: California’s Propositions 15, 19 Amend Tax on Real Property
Of the twelve statewide ballot propositions certified to appear on the ballot for the upcoming election on November 3, 2020, two seek to amend the taxation of real property in California. Before diving into the proposed changes, a brief review of the current property tax regime is necessary.
Current Property Tax Regime: Proposition 13 and Progeny
In 1978, after years of regular increases in the property tax rates and frequent property value assessments by the California legislature to meet annual budget shortfalls, the voters of California approved Proposition 13. This proposition amended the California Constitution to cap the property tax rate to one percent of assessed value and limited increases in assessed value limited to two percent annually.
The value of real property is reassessed to fair market value on a Change of Ownership (the “base year value”), or for real property owned by an entity, a Change in Control. Each year after the initial reassessment, the assessed value is increased by the statewide consumer price index, not to exceed two percent annually (the “factored base year value”).
Propositions 58, passed in 1986 and later codified by Revenue and Taxation Code section 63.1, excluded from property tax reassessment transfers of real property between parents and children (in either direction) of a primary residence of any value in addition to real properties having cumulative factored base year values of $1 million. This exclusion was extended by Proposition 193 in 1996 to transfers from grandparents to grandchildren (but not vice-versa), so long as the middle generation is deceased (i.e. child of grandparent, parents of grandchild).
Propositions 60 and 90 added further protection from property tax reassessments for homeowners over age 55 and are generally discussed in the same breath.
Proposition 60 (passed in 1986) permits persons over the age of 55 to sell his or her principal place of residence and transfer the factored base year value of such residence to a replacement residence, so long as the replacement residence is of an equal or lesser fair market value to the original residence and so long as the replacement residence is located in the same county as the prior residence.
Proposition 90 permits a homeowner over age 55 to transfer such the factored base year value of a principal residence to a replacement home in a different county, provided the county in which the replacement home is located permits such transfer. According to the Board of Equalization, only ten California counties currently allow Proposition 90 intercounty transfers: Alameda, Los Angeles, Orange, Riverside, San Bernardino, San Diego, San Mateo, Santa Clara, Tuolomne, and Ventura.
Propositions 60 and 90 provide a one-time property tax exclusion; once a property owner or his or her spouse has a claim for this exclusion approved, both are barred from future exclusion claims.
Finally, Proposition 110 (codified by Revenue and Taxation Code section 69.5) permits transfers of the base year value on the sale of a primary residence to a replacement residence of an equal or lesser fair market value by any person who is severely and permanently disabled at the time of the sale of the original residence. This is also a one-time exclusion, and once claimed, it prevents the property owner from future Proposition 110 and Proposition 60/90 claims. Further, intercounty Proposition 110 transfers are limited to the ten counties listed above which have approved intercounty Proposition 90 transfers.
2020 Ballot: Proposition 15
Proposition 15 seeks several amendments to the California Constitution which would adjust the above-described formula for property tax assessment, but only for real property zoned for commercial and industrial use. Residential property owners would not be affected by the proposed changes. Similarly, commercial and industrial property owners holding property with a fair market value of less than $3 million or property zoned for commercial agriculture would also exempt from the proposed change, which would require the filing of an annual exclusion claim. Further, the proposed changes would be delayed for five years if at least fifty percent of a property is occupied by qualifying small business.
Proposition 15 mandates that commercial properties be reassessed at least every three years. The tax rate will be determined by the State Legislature, and therefore will no longer be constitutionally capped at one percent constitutionally.
The proposed changes would convert California property taxation from the current “single roll” or “unified roll” system, where residential and commercial properties are assessed and taxed under a common set of rules, to a “split-roll” system, by which the property tax for residential and commercial properties are assessed and taxed by different standards.
2020 Ballot: Proposition 19
Proposition 19 seeks to revise the frequency and manner in which a qualifying property owner may transfer the factored base year value of a sold primary residence to a replacement residence (currently governed by Propositions 60, 90, and 110, explained above) – and significantly limit the parent-child and grandparent-grandchild exclusions.
First, the proposition seeks to update the transfer of factored base year value for persons over 55 and persons with permanent disabilities.
Currently, a person over 55 or with a disability may only transfer the factored base year value of a sold home to a new home in the same county, pursuant to Proposition 60, or to one of ten approving counties, pursuant to Proposition 90. This year’s Proposition 19 seeks to permit persons over 55, person with disabilities, and victims of natural disasters and hazardous waste contamination to transfer the factored base year value of their original home to a new home located anywhere in California.
Victims of natural disasters and hazardous waste contamination would be permitted one such transfer. Persons over 55 or with a permanent disability would be permitted three such transfers, increased from the one such transfer permitted by Propositions 60 and 90.
Additionally, whereas Propositions 60 and 90 currently restrict the replacement home to an equal or lessor value of the original residence, Proposition 19 would permit transfer to a more expensive home but would require a pro rata upward adjustment of the factored base year value. For example, if a residence with a factored based year value of $300,000 is sold for $1 million, and a replacement residence is purchased for $2 million, the new factored base year value will be $1.3 million (instead of $2 million that would result under current law).
The second major change sought by Proposition 19 is the limitation of the parent-child (Proposition 58) and grandparent-grandchild (Proposition 193) exclusions to transfers of the primary residence of the transferor which continues to be used as a primary residence by the recipient. This change would eliminate the current exclusion of $1 million of factored base year value that currently can be transferred for properties other than a personal residence.
Further, the primary residence transferred from parent to child or grandparent to grandchild will only be entirely excluded from reassessment if it has a fair market value equal or less than the sum of the current factored base year value plus $1 million. Properties with a fair market value in excess of the sum of the current base year value plus $1 million would be reassessed by adding the excess to current base year value. The $1 million amount would also be annually increased based on the change in the California House Price Index beginning in 2023.
If you have questions regarding California’s Propositions 15 or 19, or any property tax or reassessment matter, please contact one of the authors.
Zane S. Averbach, Michael Hackman and Alex J. Hemmelgarn are attorneys in our Corporate and Tax Planning Practice Groups.