Empty Nesters and Proposition 19
Summary
As empty nesters consider right-sizing their homes, they may also be thinking about the potential tax implications of selling their property. In California, key considerations may be the capital gain tax and the portability of a low property tax basis under Proposition 19.
With our daughter in college and son on his way this Fall, we often hear our peer group discussing what comes next when the kids are out of the house, sound familiar? More travel, relocating, retiring, right-sizing the home; all these topics are on the table, at least in concept, with many of our peers. As real estate agents with Compass in Los Altos, the most common driver behind selling the home is that the property is too large and difficult to maintain once the kids have moved out.
As empty nesters consider right-sizing their homes, they may also be thinking about the potential tax implications of selling their property. In California, key considerations may be the capital gain tax and the portability of a low property tax basis under Proposition 19.
What is Proposition 19?
Proposition 19, which was passed in November 2020, made several changes to California’s property tax laws. One of the most significant changes is that it allows homeowners who are over 55 years old, disabled, or victims of natural disasters to transfer their current property tax basis to a new home within the state.
Under the previous law, homeowners could only transfer their tax basis once in their lifetime and only to a home of equal or lesser value. Proposition 19 removed the value limitation and allows homeowners to transfer their tax basis to a more expensive home, subject to certain conditions.
How does this impact empty nesters?
For empty nesters, Proposition 19 can provide a significant tax benefit when right-sizing their homes. If they sell their current home and purchase a new one within the state, they can transfer their current property tax basis to the new home. This can result in substantial tax savings, particularly for homeowners who have owned their property for a long time and have a low tax basis.
However, it’s important to note that there are some limitations to this tax benefit. The new home must be purchased within two years of selling the previous home, and the new home must be used as the primary residence. Additionally, the tax benefit may be limited if the new home is significantly more expensive than the previous one.
What about capital gain taxes?
While Proposition 19 can provide a tax benefit for homeowners, they may still face capital gain taxes when selling their property. Capital gains are the profits earned from the sale of an asset, such as a home, and are subject to federal and state taxes.
In California, homeowners are subject to capital gain taxes on the difference between the sale price and their original purchase price, plus any improvements made to the property. However, homeowners may be able to reduce their capital gain tax liability by deducting selling costs, such as real estate agent fees, closing costs, and home improvement expenses.
Conclusion
Empty nesters who are considering right-sizing their homes should be aware of the potential tax implications, including capital gain taxes and the portability of a low property tax basis under Proposition 19 in California. By understanding these tax laws and consulting with a tax professional, homeowners can make informed decisions that meet their financial goals and minimize their tax liability.
About Us: Rick and Suzanne Bell are real estate agents with over 50 years of combined experience in real estate home sales. Serving Los Altos, Los Altos Hills, Palo Alto, Mountain View, and surrounding Silicon Valley communities, Rick and Suzanne deliver a diverse and unique skill set when assisting clients in the marketing of their homes.
Rick’s background in both commercial and residential real estate marketing, coupled with his personal experience in real estate investment and home renovation empowers Rick’s clients with creative, unique, and practical solutions when preparing and marketing their homes for sale.
Having managed nearly 500 employees as a Nordstrom store manager, Suzanne’s background in leadership, problem-solving & customer service provides a very unique skill set in addressing the challenges often faced during a modern real estate transaction.