PROPERTY TAX ALERT: How Proposition 19 Impacts Property Taxes for California Property Owners

By: Brooke Pollard

Proposition 19 has passed. What is the impact to our clients? We see four practical effects, good and bad, of this law for California property owners:

(1) Prop. 19 eliminates the parent-child and grandparent-grandchild exclusion from reassessment for properties other than a “family home.” Prior to Prop. 19’s passage, a parent could transfer the parent’s primary residence and up to $1,000,000 of assessed value other property (vacation home, commercial property, rental properties, investment properties and so on) to their children and such properties would retain the low adjusted base year value for property tax purposes. Meaning that the property taxes would stay substantially the same after the transfer to children. Now, unless both the parent and the child will use the property as his or her primary residence, the exclusion is terminated. Thus, children inheriting property from their parents (other than the primary residence), may see a substantial increase in property taxes on such inherited property.

(2) Prop. 19 reduces the parent-child exclusion on a primary residence or “family home” from unlimited value to one million dollars above the current assessed value. As such, even if a parent transfers his or her primary residence to their child who also uses it as a primary residence, there could still be an increased depending on the assessed value of the property.

(3) Prop. 19 requires the “family home” to qualify as both the primary residence of the transferor (i.e. parent) and the transferee (i.e. child). 

(4) In most instances, a California homeowner over age 55 or with severe disabilities will have the ability to transfer their current property tax assessed value (aka base year value transfer) of their primary residence to another primary residence anywhere within California. This eliminated the distinction amongst counties on which would approve a base year value transfer. This change also allows individuals to purchase a more expensive property rather than just a less expensive property and keep the benefits of the base year value transfer. If a more expensive primary residence is purchased, there is now a formula to minimize the increase in base year value. Prop 19 also increased the number of times this exception can be used from one to three.

These changes will cover any transfers made after February 16, 2021. Whether the death of a parent before February 16, 2021, wherein the deeds are recorded after February 16, 2021, remains an open question as to whether Prop 19 would apply, or the prior more favorable law would apply. We will learn more as the Board of Equalization, which governs how property taxes are applied, issues guidelines and updated forms to match the Proposition that just passed. This will be unfolding in the coming months.

Planning Opportunities:

1. If a parent was planning to give a property to a child at their passing in their trust or in other estate planning documents, they may want to think about giving it now, before February 16, 2021, if preserving the base year value property tax is important.

            Concerns: A gift during lifetime will not receive a step-up in basis on the death of the parent; but would receive such step-up in basis if held by the parent until their passing. Also note the transfer of property from parent to child that is subject to a mortgage may trigger the Due on Sale clause, causing the bank to have the right to require payment in full of the mortgage. Parent will also lose the income and the principal of such property from their net worth. Parents will also be required to prepare and file a gift tax return.

2. If you were concerned about putting a property into an LLC before because it will lose the benefits of Prop 58 (parent-child transfers) or Prop 193 (grandparent-grandchild transfers), it is unlikely that you have this benefit in the future with Prop.19, so the creation and utilization of an LLC may be a better option for asset protection purposes.

            Concerns: see above regarding Due On Sale clauses for property transfers to an LLC with a mortgage.

Prop 19 was touted as a way to increase funds for firefighters and wildfire containment programs and to “eliminat(e) unfair tax loopholes used by East Coast investors, celebrities, wealthy non-California residents, and trust fund heirs…” But a deeper dive into the legislation shows that it also eliminates property tax increase protections for many more California property owners.

This article is not legal advice, but a newsletter that explains the effects on Proposition 19, and should not be used to make legal decisions. Please consult with your attorney regarding the effects of Proposition 19 on your situation.

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