How to calculate your base year value under Proposition 19

By Jeff Lazerson | jlazerson@mortgagegrader.com | MortgageGrader.com | November 4, 2024

Article originally posted in Orange County Register on October 31, 2024

Last week’s column explored Proposition 19 and the number of property tax transfer applications approved statewide in the last fiscal year.

Voters in 2020 approved Prop. 19, which allows property owners and those who inherit a primary residence to transfer their base year value (taxable value), either from a previous home to a new home, or one for which they are assuming ownership.

This week, I will explain how to transfer a family home between parent and child(ren), also known as an intergenerational transfer, without causing a change in ownership for property tax purposes.

Information was largely obtained from the California State Board of Equalization, the Los Angeles County assessor’s website and the Orange County assessor’s office.

Here’s a little background on property taxes.

Proposition 13 limits assessment increases to 2% annually unless there is a change in ownership or new construction on the property.

Under Prop. 19, which started in 2021, parent-child, grandparent-grandchild (in the event parents are deceased) property transfers may be excluded from reassessment.

Here’s how it’s done.

Assessed real property value is generally the purchase price of the property. This is called the “base year value.”

Market value is the price for which a property could be sold today. For example, you bought your home for $500,000 seven years ago, and you can now sell it for $1 million (which is the current market value).

The factored base year value is the base year value plus up to 2% annual increases for the duration of the property ownership.

Under Prop. 19, those inheriting a home are eligible for an exemption to reassessment for up to $1,022,600 plus the factored base year value of the property.

The excluded value limit under Prop.19 is the sum of the factored base year value or FBYV of the property plus $1,022,600. (This exclusion was adjusted in early 2023, rising 2.26% from the initial $1 million exclusion based on the Federal Housing Finance Agency’s House Price Index for California.)

If your home’s market value is equal to or less than the limit (FBYV plus $1,022,600), you get to keep the same property tax rate. If the market value exceeds this limit, partial relief is available. The amount exceeding the value limit is added to the factored base year value.

Here are some examples:

At the time of the transfer, a single-family residence has an FBYV or taxable value of $400,000 and a fair market value of $1.6 million. Add the FBYV ($400,000) plus the Prop. 19 allowances of $1,022,600 which equals the excluded amount of $1,422,600.

Since the fair market value of $1,600,000 is greater than the excluded amount, take $1,600,000 minus $1,422,600 which equals $177,400.

Take the factored base year value of $400,000 plus the difference $177,400 which equals $577,400. This becomes the new taxable value.

Here’s another example:

At the time of transfer, a property has a FBYV of $800,000 and a market value of $5 million.

Take the $800,000 plus $1,022,600 which equals $1,822,600.

Take $5 million (the fair market value) minus $1,822,600 (the excluded amount), and you get $3,177,400.

Take $800,000 plus the difference $3,177,400 which equals $3,977,400. This becomes the new taxable value.

Next week’s Proposition 19 column will address how homeowners 55 and over, victims of wildfires or natural disasters and those severely or permanently disabled can transfer their taxable value of their principal residence to a replacement residence.

Corrections

Last week’s column incorrectly stated that inherited properties occupied by a child or grandchild would not be reassessed a new base tax rate under Prop. 19. Children who live in an inherited home under Prop. 19 can avoid a tax reassessment if the home’s market value is less than $1,022,600. If the home’s market value exceeds its tax base value plus $1,022,600, it triggers a reassessment, adding the amount exceeding the value limit to the factored base year value. Read more about this at boe.ca.gov/prop19/#FAQs

Also, the Office of the Assessor in Los Angeles County corrected one of its answers from last week’s column. In fact, a child cannot transfer Prop. 19 tax benefits to another child.

Freddie Mac rate news: The 30-year fixed rate averaged 6.73% on Thursday, Oct. 31, rising from 6.54% a week ago. That’s still down from a year ago, when the rate averaged 7.76%. The 15-year fixed rate averaged 5.99%, up 5.71% last week. A year ago, it averaged 7.03%, Freddie Mac said.

The Mortgage Bankers Association reported a 0.1% mortgage application decrease compared with one week ago.

What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages with one point: A 30-year FHA at 5.875%, a 15-year conventional at 5.625%, a 30-year conventional at 6.375%, a 15-year conventional high balance at 6.125% ($766,551 to $1,149,825 in LA and OC and $766,551 to $1,006,250 in San Diego), a 30-year high-balance conventional at 6.625% and a jumbo 30-year fixed at 6.625%.

Note: The 30-year FHA conforming loan is limited to loans of $644,000 in the Inland Empire and $766,550 in LA, San Diego and Orange counties.

Eye-catcher loan program of the week: A 30-year mortgage, with 30% down locked for the first 5 years at 5.875 with 1 point cost.

Jeff Lazerson, president of Mortgage Grader, can be reached at 949-322-8640 or jlazerson@mortgagegrader.com. His website is www.mortgagegrader.com.

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* Specific loan program availability and requirements may vary. Please get in touch with your mortgage advisor for more information.