In November 2020, California voters approved Proposition 19. This new law dramatically changes the property tax rules when property is inherited by a child from a parent (or, in certain circumstances, when property is inherited by a grandchild from a grandparent). It also expands the ability of certain homeowners to keep their property tax base when they move to a new home within California.
The following is a summary of the relevant estate planning information related to Prop 19 for your consideration. We have also created a Prop 19 Overview Video and Resource Page with more information. Please note that the considerations for whether you should make transfers or changes now based upon this new law are very complex, and we are not recommending immediate transfers to children or grandchildren without careful consideration and expert advice.
Transfers of Taxable Value (Keeping a Low Property Tax Base)
Currently, the law in California is that individuals over age 55 have a once-in-a-lifetime opportunity to transfer their property tax base (the amount their annual property tax bill is based on) to a new residence of equal or lesser value. This will work as long as the new home is in the same county, or one of the ten counties that permit inter-county transfers. Since property tax increases are capped under Prop 13, many homeowners end up with a very low property tax bill on homes that they have owned for a very long time. Existing law has a relatively narrow provision for those over 55 to “downsize” but not end up with a higher property tax bill by transferring their existing base to their new home.
Beginning on April 1, 2021, Proposition 19 will allow individuals a more expansive group of individuals to transfer their property tax base (those over age 55, with severe disabilities or who are victims of natural disasters). The new law will also allow those that qualify to make these transfers up to three times - up from just one time under current law). Finally, the new law will allow qualifying residents to purchase a more expensive home and still transfer the property tax base, but there is an adjustment for the value between the sales price of the original residence and the sales price of the replacement residence.
Among other impacts, it is generally anticipated that this new law will increase the number of homeowners over 55 to make moves that they may have been holding off on due to huge increase in property tax bill they might have had.
Parent-Child (and Grandparent-Grandchild) Exemption
Under the current law, transfers of real property between parents and children and grandparents and grandchildren (where the grandchild’s parent is deceased) are excluded from reassessment. Therefore, if a parent dies and leaves her child real estate, that child will also inherit that parent’s (low) property tax value because those transfers are excluded from reassessment. Notably, there is a cap on transfers other than a primary residence of $1,000,000.
The change to this long-standing benefit (since 1986) is tremendous. Proposition 19 effectively eliminates the parent-child and grandparent-grandchild exclusion from reassessment, except if both of the following are true:
The real property being transferred is the primary residence of the parent; and
The child who is inheriting or otherwise receiving the property occupies that property as a principal residence within a year after the transfer.
Even if these residence requirements are met, the exclusion is limited further. The child’s taxable value is determined based on whether, and by how much, the property’s value at the time of the transfer is greater than the parent’s taxable value by more than $1,000,000 (so basically, there is a cap):
The Takeaways
There is a lot we do not yet know about how Proposition 19 will be implemented. Proposition 19 has muddied the once clear waters of the parent-child exclusion and estate planning in which such exclusions are a consideration. For example, what if a child inherits a property, uses it as its primary residence and then decides to move elsewhere and convert that property into a rental property? As Proposition 19 is currently drafted, it is unclear what the result will be. Prior drafts of similar propositions that were never passed indicate that the property could be reassessed and that it may even be reassessed back to the date of death. We do not currently know what the consequences will be.
This also complicates planning that used to be more flexible. For example, how planning is affected when a parent leaves a home to multiple children. It is unlikely that multiple children will make the home their primary residence. How, then, will the property be assessed?
Finally, it is not yet clear how is this law applied to individuals who die prior to February 16, 2021, where the deeds are recorded after February 16, 2021. It remains an open question as to whether Proposition 19 would apply or whether the prior Proposition 13 and Proposition 58 (current law) would apply.
Four these reasons, Proposition 19 makes it incredibly important to work with your attorney when considering and effecting transfers of property. Not only have the planning considerations changed, but the process for dealing with the county assessors may become more time consuming and require more careful review of calculations and elections.
With a February 16, 2021 deadline approaching, it is important to consider who may have a planning opportunity available to them that would help alleviate the consequences of this Proposition and, if they do, take advantage of it quickly. The availability of options will depend on the unique circumstances of each individual and family. Unfortunately, there is not one uniform solution for everyone.
Note that the deadline for implementing transfers under the current law is actually February 11, 2021 because February 15, 2021 is a holiday.