The November election brought with it the most significant change to California’s property tax laws since 1978: the near-total elimination of the parent-child exclusion from property tax reassessment. Proposition 19 will become effective on February 16, 2021, well in advance of any clarification we may receive by the CA legislature. Here is what we know so far:
The new law has two primary parts. The first affects how property is reassessed when it passes from a parent to a child. Transfers between parents and children are currently exempt from property tax reassessment. Proposition 19 eliminates the Parent-Child exclusion, except in the limited circumstance when a property that is the residence of the parent is to be also the residence of the recipient child, and only for $1 million of appreciated value. In effect, Prop. 19 means that residential, commercial, vacation, and industrial properties will be reassessed for property tax purposes when the property gets transferred to the owner’s children.
Let’s look at an example:
Parents seek to give their home and a rental property to their child. The home has a taxable value of $2 million with a property tax bill of $22,000. Today, the home has appreciated, and the value is now $4 million, which means it has increased by $2 million. The rental property has a taxable value of $500,000, but its FMV is $1 million, with a property tax bill of $5,500.
Under the current law, these parents could gift their properties to their daughter without either property being reassessed for tax purposes. The child would continue to pay $22,000 on the assessed value of the home (with modest annual increases) and $5,500 for the rental property.
After February 15, 2021, when Prop 19 takes effect, however, the calculus would be quite different. First, the rental property would be reassessed at its FMV of $1 million, resulting in a tax bill of $11,000, or double what it was previously. The primary residence will also be reassessed, and whether there is a partial exclusion from reassessment depends on if the daughter wants to make the home her primary residence. If she does, she will pay $33,000 in taxes instead (because the first $1 million in appreciation can be excluded). If not, she will pay $44,000 in taxes on a new FMV of $4 million.
The second part of Proposition 19 actually broadens certain homeowners’ opportunities for tax savings and applies to individuals that are over the age of 55, severely disabled, or victims of wildfires and other natural disasters. These homeowners may take their property tax basis to a new home anywhere in the state of CA, even if the property is a more expensive property. This is a potentially valuable tool for property owners to transfer their low property tax basis to a new residence, making many feel less bound to their current homes because of the home’s low assessed tax value. Perhaps this may help the current housing market’s low-inventory problem, as more homeowners take advantage and trade properties in the future.
The passage of Proposition 19 has generated a number of estate planning issues and has certainly changed the questions that attorneys should ask clients when deciding how best to protect their interests regarding real property. If you have questions about how the new law will affect your estate plan, please contact our office without delay.