Prop 19 has not been in the headlines much since the November election, but it’s effects are very real and now is the time to understand how it might affect your real estate holdings.
Children Inheriting Parents’ Property Will Be Impacted Financially
Proposition 19 replaces Proposition 58 and greatly limits the scope of the parent-child exclusion. Beginning on February 16, 2021, (a) the ability to transfer $1 million of assessed value of other property (i.e., property that is not one’s primary residence) is completely eliminated, and (b) the ability to transfer a primary residence[2] between parent and child without reassessment will not apply unless two conditions are met: (i) the primary residence must also become the recipient’s primary residence, and (ii) the fair market value of the primary residence at the time of transfer cannot exceed the transferor’s assessed value by more than $1 million.[3] If, at the time of transfer, the difference between the assessed value and the fair market value of the home exceeds $1 million, the new assessed value will be the fair market value less $1 million.[4] If the transferor’s primary residence does not become the recipient’s primary residence, then the property will be reassessed to its fair market value. See the chart on the California Board of Equalization’s website for a side-by-side comparison of the parent-child exclusion pre- and post-Proposition 19: https://www.boe.ca.gov/prop19/.
EXAMPLE
A parent owns a home that is her primary residence and a rental property (such as an apartment building or commercial building) in California. The home has an assessed value of $500,000 and a fair market value of $3 million. The rental property also has an assessed value of $500,000 and a fair market value of $2 million. Even though the properties have different fair market values, their property tax liability is similar because they have the same assessed value. The combined annual property tax of both properties with a property tax rate of 1.25% is $12,500.[5] The parent wants to transfer both properties to her daughter.
Result Prior to Proposition 19: There is no reassessment on the transfer of either the home or the rental property from parent to daughter. The home can be transferred to the daughter regardless of its value because it is the parent’s primary residence, and the assessed value of the rental property falls below the $1 million threshold. Therefore, the combined annual property tax will remain $12,500. There is also no restriction on the daughter’s use of either property and the daughter may use both as investment properties if she so chooses.
Result After Proposition 19: There is an adjustment to the assessed value of the home and a full reassessment on the rental property. The new assessed value of the home is $2 million because the fair market value exceeds the assessed value by more than $1 million (in that case, the calculation for the new assessed value is the fair market value of $3 million less $1 million). The new assessed value for the rental property is its fair market value of $2 million because no exemption to reassessment applies for transfers of real property from parent to child other than the primary residence. The new combined annual property tax will be $50,000. In addition, the daughter must use the family home as her primary residence or else the home will be reassessed to its fair market value of $3 million, which would increase the combined annual property tax for both properties to $62,500.
Prop. 19 will reduce or eliminate some generous tax breaks that families get when property is transferred between parents and children. But it won’t change the rules for trusts themselves. Some parents, however, are transferring property into an irrevocable trust for their children before these changes take effect on Feb. 16, to preserve the tax breaks.My best advice is to talk to the attorney who set up the trust, and possibly a tax professional. Trusts are complicated, and there are endless varieties.
Transfer of Assessed Value to New Primary Residence for Persons Who Are Age 55 and Over, Disabled, or Victims of Wildfire or Other Natural Disasters
Eligible homeowners may now transfer their tax basis anywhere within the State and to a property of greater value, whereas previously homeowners were limited to transfers within certain counties and to homes of the same or lesser market value. Prop. 19 increases the number of times that certain people may transfer their tax assessments. If a person is 55 years or older, has severe disabilities, or lost a home in a natural disaster, the person may transfer their tax assessment up to three times now (up from one). The new law also requires market-value reassessments for inherited properties that are not used as the heir’s principal residence.
For those property owners age 55 and older, they will be able to blend the taxable value of their old home with the value of a new, more expensive home, which will result in positive property tax savings. For example, if a senior couple sold their home with an assessed value of $250,000 for $2 million and bought a new home for $3 million, the new home’s assessed value would be $1.25 million, which is the $250,000 assessed value, plus the $1 million increase in home value.
Sending...