Big property tax bills start to roll in from Prop. 19 'reform'
90-year-old Ann McGuire bought rental property to provide financial support for her disabled son after she dies. Prop. 19 may make this plan unworkable.
ADAM PARDEE
By Ted Andersen – Digital Editor, San Francisco Business Times
Oct 17, 2024
Updated Oct 17, 2024 5:53pm PDT
A little-known state law that went into effect during the pandemic is now wreaking havoc on transfer of property between generations, landing some with a surprise tax bill of tens of thousands of dollars and forcing others to sell long-held family property outright.
Proposition 19, billed as “The Home Protection for Seniors, Severely Disabled, Families, and Victims of Wildfire or Natural Disasters Act,” was approved by 51% of state voters in November 2020, less than two months after San Francisco’s skies famously turned orange from Northern California wildfires. But behind the scenes was the California Association of Realtors, which stood to benefit if punishing new tax bills hidden within Prop. 19 led to more home sales. The group contributed $45 million to passage.
Now those tax bills are starting to come due as more properties pass from one generation to the next.
How did this happen?
Tinkering with Proposition 13
First, a bit of history: Nearly a half century ago, California enshrined into law a promise that property taxes would not rise so quickly as to force owners out of their homes. Proposition 13 in 1978 capped property tax bills at 1% of assessed value, and limited assessment increases to 2% annually, for residential and commercial properties alike. Property is fully reassessed only when sold; those who have held property for decades have seen values skyrocket at the same time Prop. 13 has held down their tax bills.
Over the years, Prop. 13 tax protections were extended to generational transfers of family property. In 1986, Prop. 58 let children inheriting a home take over their parents’ tax basis. Prop. 193 extended this right to grandchildren in 1996. So when a home was passed down, the previous owner’s tax basis — often dating back decades — went with it.
Prop. 19 made it easier for seniors, the disabled and those who lost homes to wildfires to keep their existing tax basis if they moved house. Those were provisions highlighted by sponsors like then-Sen. Jerry Hill, D-San Mateo, and assemblymembers Rob Bonta, D-Oakland, and Bill Quirk, D-Hayward, and supporters like the CAR. Less noticed was its repeal of Prop. 58 and 193 tax protections for heirs.
Now, those who inherit a single-family home and turn it into their primary residence get a limited tax break: the home is reassessed to its current value, but they can shield its “factored base year assessed value”(the original assessment, adjusted over the years by Prop. 13) and an additional $1 million. They pay the existing tax plus any difference. Those who don’t occupy the inherited home as their primary residence pay tax based on its full current market value (see illustration, page 19).
Owners of rental property lack even those limited options, as Pacifica’s Marianne Osberg discovered when she took over a 28-unit apartment complex in Sharp Park after her mother passed away.
“The property taxes on one building alone went up $50,000 on top of what we already pay,” she said, adding that the property also requires a lot of upkeep. “It went from around $20,000 — and that includes the sewer bill — and now it’s over $70,000.”
Marianne Osberg at a Fix Prop. 19 rally in Pacifica.
COURTESY OF MARIANNE OSBERG
Osberg said it forced her to raise the rents. “I’ve got current and retired teachers and people on housing, and I’ve got folks just starting out so they can buy their first home, tradesmen and folks who are self-employed,” she said. “I’m having to pass that cost on to them just to make it because I’ve got to repair things. I can’t just eat that cost.
“Meanwhile, they are giving tax breaks to developers to build affordable housing and they are punishing mom-and-pop landlords who are trying to provide it,” she said. “That is really wrong.”
Ninety-year-old Ann McGuire bought her first San Francisco property in the late 1960s for less than $30,000. Her husband had left after she had given birth to her son, Vaughn, who was diagnosed with osteogenesis imperfecta, also known as brittle bone disease.
Between the challenges of being a single mother and Vaughn’s many bone fractures and medical appointments, she for decades saved from her job as a nurse at Laguna Honda until she was able to put enough money down in 1986 to secure a mortgage for a then-$300,000 duplex near 19th Avenue and Lake Street. The idea was that all that hard work and decades of struggle would yield rental income that could support her disabled son after she was gone.
Ann McGuire in her home in the Sunset District in San Francisco on Oct. 9, 2024. She turns 91 in November.
ADAM PARDEE
“The reason I was able to hang on was because I was scared to let go and I had Vaughn to look after,” she said.
The tax increase that will be coming to her son after she passes away may make it all for naught. Her longtime tenants pay below market rent — a fact she had been proud of — but coupled with rent control and the rising cost of insurance, a much bigger tax bill will push the McGuire’s rental business into the red. A building sale would provide money forher son to live off of, but for how long?
“Once they are gone,” she said of the units, “there is no income,” she said.
What were they thinking?
Aside from the CAR and its political allies, the reassessment provisions of Prop. 19 have defenders. Giving heirs a permanent tax break on inherited homes or rental properties extends the privilege of those with the good fortune to have parents or grandparents who owned California property decades ago, a group that is racially and demographically different than the state today. Those heirs are already sitting on substantial wealth given the massive increase in real estate values since then. Renters and newer arrivals have none of this. And, Prop. 19 defenders point out, there’s an easy way to avoid the tax hit: Sell the home, take your inheritance in cash and know that you’ve helped to boost the supply of housing available to others.
San Francisco Assessor Joaquin Torres
SAN FRANCISCO HOUSING AUTHORITY
Some San Francisco property owners saw Prop. 19 coming. Right before the law went into effect on Feb. 16, 2021, families in the city scrambled. According to data from the Assessor’s Office, there were 1,941 “claims/exclusions” — properties transferred without a reassessment — approved in 2018, 2,018 in 2019 and 2,314 in 2020. But in 2021, from just Jan. 1 to Feb. 16, the city approved 3,456.
“Here you can see the rush of taxpayers seeking to transfer their property before the new rules were put into place,” San Francisco Assessor Joaquin Torres said. “In a one-and-a-half-month period, our office saw more claims than the entire year prior.”
Torres said that multiunit property-owning families in San Francisco, who often parked their money in real estate, have been particularly interested in the financial burden of Prop. 19. He said when his office reached out to property owners in the city, especially those whose rental properties were at risk of being reassessed, the reaction was one of dismay, especially as insurance costs have also skyrocketed.
“The response I get from many people is being angry, disappointed, disillusioned and shaking of the head: ‘Why would they do that to us during this time?’” he said. “I really feel that this measure was sold on the backs of our fear. It was basically a month after the sky turned orange, and I don’t think time was taken to really educate us on the realities of these implications and how we are going to affect from an equity perspective changes to intergenerational transfer of property.”
Where did the money go?
Prop. 19’s promised financial benefits have largely failed to appear.
Proponents had projected that Prop. 19 would raise about $4 billion per year for the state with part of it designated for new fire-prevention programs. But a closer look at state finances reveals that zero dollars have been transferred to the California Fire Response Fund and the County Revenue Protection Fund since 2021.
Specifically, in three years of reports from the California Department of Finance, no increase in state income tax revenues has materialized under Prop. 19. This is because some taxpayers have been able to deduct higher real estate taxes from their gross income, lowering their income tax liability, though federal law now limits such deductions.