It is probably safe to assume that one of the factors behind the passage of Proposition 19 by California voters was the promise that doing so would give older homeowners the ability to retain their lower property tax base on a residence by transferring part of it to a newly purchased residence. Also included in the constitutional amendment recently passed by a slim margin of total ballots cast is a provision requiring the reassessment to the market value of inherited properties not used as a principal residence.
Property not used as a primary residence, which includes second homes, investment property, and property owned and used by family businesses, will be negatively affected because the amendment now requires a reassessment to the market value of these types of properties on any change of ownership. Now is a good time to take a closer look at the consequences this may have for families who may be denied the opportunity to retain real property because doing so may no longer be economically feasible.
Proposition 19 expands ability to transfer property tax base for the chosen few
Proposition 19 amends the state constitution. It includes a provision permitting homeowners who are at least 55 years of age, disabled or had their homes destroyed by wildfires and other disasters to avoid losing the benefit of a low property tax base on a primary residence when they sell. Instead, they may transfer their property tax base to a new residence to any county in the state. As welcome as the provision may be that allows some property owners to take their low property tax assessments with them when they sell, another provision will prove to be more troublesome.
Prop. 19 means higher tax bills on non-residential property
The law in place prior to the passage of Prop. 19 exempted from reassessment any transfer of real property from parents to their children or from grandparents to their grandchildren and vice versa. This included property transferred through inheritance as well as transfers taking place during the lifetime of the parent or grandparent. Prop. 19 changes the rules applicable to such transfers.
Prop. 19 provides for the reassessment of the market value of real property transferred between parents and their children or grandparents and grandchildren unless the party to whom the property has been transferred occupies it as a principal residence. The result is likely to be to force people to sell what may have been their family home or investment property simply because the increase in property taxes caused by a reassessment makes it financially unfeasible to retain it. To make things even more difficult, the exclusion was limited for principal residences to $1 million in excess of the current assessed value. Previously, there was no limit on the value of a principal residence that could benefit from the parent-child exclusion and there was no requirement that the child or children had to reside there after the transfer.
Real property other than the principal residence of the transferor was previously excluded from reassessment on a transfer from a parent to a child or grandchild or vice versa with a limit of $1 million of assessed value. That meant that a couple had $2 million of assessed value that could be transferred prior to triggering a reassessment. With the passage of Prop. 19, that exclusion is eliminated entirely as of February 16, 2021 (note that it effectively expires well before that date since the date of recordation is the date of transfer for parent-child exclusion purposes for the Assessors). That leaves a very small window of time to take advantage of the last days of the parent-child exclusion.
Estate Planning in light of Proposition 19
Since the passage of Prop. 19, we have been working with some of our clients to put together a plan to preserve the parent-child exclusion for rental properties, vacation homes, and/or business properties. Together with the doubts about how long the federal estate/gift tax credit will remain at its current level, the passage of Prop. 19 has generated a flurry of year-end planning.
A consultation with an experienced and knowledgeable estate planning attorney may offer options for handling the challenges presented by Proposition 19. Contact the trust and estate planning attorneys at Magee & Adler to schedule a consultation by calling 562-432-1001.