Transfer of California Property Tax Base to Replacement Property
Did you know that in California, property owners aged 55 and older can transfer the taxable value of their home when they sell and buy or build another home, thus avoiding higher property taxes? This is thanks to Proposition 19, approved by voters in November 2020. It allows individuals over 55 to transfer the taxable value of their principal residence to a replacement principal residence located anywhere in California up to three times, provided specific requirements are met. This prevents the replacement home from being reassessed at market value due to a change in ownership, which can significantly increase property taxes compared to those on the original residence. “Taxable value” refers to the property’s base year value plus inflationary adjustments, commonly known as the factored base year value. The base year value transfer provisions under Proposition 19 for individuals over 55 are implemented under Revenue and Taxation Code (R&TC) section 69.6 for transfers occurring on or after April 1, 2021. (For transfers occurring before April 1, 2021, see Publication 800-3a Information Sheet, Transfer of Property Tax Base to Replacement Property – Age 55 and Older Occurring On or Before March 31, 2021.) To qualify for this base year value transfer, the following conditions must be met: – The claimant must be age 55 or older at the time the original property is sold. – Either the sale of the original home or the purchase or new construction of the replacement home, or both, must occur on or after April 1, 2021. – The claimant must own and reside in the original property at the time of sale or within two years of purchasing or constructing the replacement property. – The original property must have been eligible for the homeowners’ or disabled veterans’ exemption, and the replacement property must be eligible for one of these exemptions. – The original property must be sold, and the replacement property purchased for consideration. Consideration is defined as something of value such as payment of cash, creation or cancellation of debt, or exchange of other property. Value Comparison Test and Calculation for Replacement Property’s Base Year Value A claimant may purchase or newly construct a replacement property of any value; however, any value exceeding the original property’s market value is added to the original property’s transferred base year value. If the replacement property is purchased or newly constructed after the original property is sold, the replacement’s market value can exceed the original’s market value by up to 105 percent if purchased within the first year after the sale of the original, or 110 percent within the second year, without excess added to the transferred taxable value. If the replacement property is of equal or lesser value than the original property, then the factored base year value of the original property, plus any applicable annual inflationary adjustments between the sale of the original property and the purchase or construction of the replacement property, becomes the new base year value of the replacement property. “Equal or lesser value” means the full cash value (market value) of the replacement property does not exceed: – 100 percent of the original property’s market value if the replacement property is purchased or new construction completed before the sale of the original property, – 105 percent of the original property’s market value if the replacement property is purchased or new construction completed within the first year after the sale of the original property, – 110 percent of the original property’s market value if the replacement property is purchased or new construction completed within the second year after the sale of the original property. If the replacement property’s market value exceeds the original property’s market value, then the amount above the “equal or lesser value” of the original property’s market value is added to the transferred factored base year value. Example 1: Replacement Purchased Before Sale of Original – Market value of replacement property in July 2021: $730,000. – Market value of original property at sale in September 2021: $700,000. – Assessed value (factored base year value) of original property: $225,738. – Since the replacement was purchased before the sale of the original, 100 percent of the original property’s market value is compared to the replacement’s market value. The $30,000 difference ($730,000 – $700,000) is added to the original property’s factored base year value, making the new base year value $255,738 ($225,738 + $30,000). Example 2: Replacement Purchased After Sale of Original – Market value of replacement property in September 2021: $730,000. – Market value of original property at sale in July 2021: $700,000. – Assessed value (factored base year value) of original property: $225,738. – Since the replacement was purchased within the first year after the sale of the original, 105 percent of the original property’s market value ($700,000 x 105% = $735,000) is compared to the replacement’s market value ($730,000). Since there is no excess value, the original property’s factored base year value of $225,738 transfers to the replacement property without any excess added. If the replacement property’s market value was $800,000, $65,000 in excess value would be added to the $225,738 transferred value, resulting in a new base year value of $290,738 ($225,738 + $65,000). Potential for Tax Savings Property taxes in California are based on the assessed value of your property. When sold or transferred, or upon completion of new construction, real property is reassessed at market value. Purchasing or building a new home can significantly increase the assessed value and result in higher property taxes. If the original property’s factored base year value is less than the market value of the replacement property, receiving a base year value transfer will result in tax savings. Example 1 Tax Savings: – Market value of replacement property: $730,000. – New base year value after transfer: $255,738. – Assessed value is $474,262 lower than market value, saving over $4,742 in property taxes per year at the one percent statewide tax rate. Example 2 Tax Savings: – Market value of replacement property: