California Voters Pass Proposition 19 – What Happens Next?
California Proposition 19 – Property Tax Transfers, Exemptions, and Revenue for Wildfire Agencies and Counties Amendment (2020) – was approved on November 3, 2020, with a slim margin of 51.1% of voters supporting it. The proposition eliminates two provisions of Proposition 13 that were very beneficial to property owners. The effective date of the changes made by Proposition 19 are:
- For Base-Year Value Transfers – April 1, 2021, and later
- For Parent to Child Transfers and Grandparent to Grandchild Transfers – February 16, 2021, and later
What do these changes mean for property owners?
Base Year Value Transfers
Homeowners who are over 55 years old, severely disabled, or a victim of a wildfire or natural disaster can transfer the assessed value of their primary home to a replacement primary home located anywhere in the state regardless of the value of the replacement home. Prior to Proposition 19, the transfer was limited to within certain counties and didn’t apply to the purchase of a more expensive home.
If the fair market value (FMV) of the new home is equal to or lesser than FMV of the old home, there is no reassessment. If the FMV of the new home is greater than that of the old home, there is partial reassessment. The assessed value of the new home is the sum of the assessed value of the old home plus the difference in FMV between the new and old home.
Under Proposition 19, a person who is over 55 years of age or severely disabled may transfer the base year value of a primary home three times.
Transfers of Primary Residences and Family Farms
Before Proposition 19, parents or grandparents could transfer (by gift or inheritance) their primary residences to their children or grandchildren without property tax reassessment irrespective of the market value of the residence at the time of the transfer. The ballot measure eliminated this parent-to-child and grandparent-to-grandchild exclusion in cases where the child or grandchild does not use the inherited property as their principal residence. As a result, if a child inherits or is gifted a house from his or her parents and chooses not to occupy it as their primary home, it will be reassessed at the current value. Guidance is anticipated as it is unclear how long the child must occupy the home to meet this principal residence test.
If the child occupies the home as their primary home, there is partial relief from reassessment depending on a value test. If the market value of the transferred residence is greater than $1 million plus the assessed value as of the date of transfer, that excess portion gets added to the assessed value and hence will increase future property taxes. For example, if a child inherits a home with a fair market value of $2 million and an assessed value of $500K, the home would be reassessed with a value of $1 million.
Beginning February 16, 2023, and bi-annually thereafter the $1 million floor will be adjusted for inflation.
Transfer of Rentals, Second Homes, Vacation Homes, or Other Real Property
Before Proposition 19, each person could transfer up to $1 million (of assessed value) of real property (other than a principal residence) to any combination of parents or children. The $1 million limit was cumulative over a lifetime. Proposition 19 eliminated this provision so any transfers of other property are now subject to reassessment.
The Board of Equalization has created useful charts to compare the pre and post-Proposition 19 rules: Proposition 19 Comparison Charts
Planning Ideas
Several options are available to avoid tax reassessments under Proposition 19. If you are considering a property transfer you need to act quickly as the transfer of title needs to be effective on or before February 15, 2021.
Transfer Property Now via Gift
Currently, the combined estate and gift tax exemption amount per individual is $11.7 million ($23.4 million per married couple) for 2021. Therefore a significant amount of property can be gifted without incurring any gift taxes. Property owners may consider gifting of property (either directly or through an irrevocable trust) so that the old, more favorable property tax rules apply and transferees get to keep the low assessed values. However, transferees will not be able to take advantage of the step-up in cost basis which would be available to them had the transfer been through inheritance. This would lead to larger capital gains when the property is sold and thus a higher tax liability. The trade-off being lower property taxes now, but a larger capital gain tax liability upon sale.
Another issue to consider with a gift is that the owner would need to give up control over the property.
Transfer to Entities
When property is transferred to a legal entity, for example, a Limited Liability Company, Proposition 19 no longer applies. Legal entities have their own set of rules for determining property tax reassessments.
A combination of gifting and entity ownership could allow the reassessments to be postponed to a future date.
An additional factor to consider for mortgaged property is that some lenders may require the mortgage to be repaid upon transfer. Creation of an entity to hold ownership would require additional annual tax filings and possibly payment of California income tax assessed on certain entities.
Every person’s situation is different and their financial goals vary. There is no single solution for all property owners. A strategy that can save property taxes may not be beneficial for income tax or estate planning. We recommend working with your attorney as soon as possible to see what might be a suitable solution for you.
Please contact us with any questions regarding Proposition 19, assistance with gifting, or estate planning.
About the Author
Anu Joshi
Anu Joshi, CPA, MST, is a Tax Principal with over fifteen years of public accounting experience and provides tax compliance and tax planning services for…