On November 3, 2020, California voters cast votes for many political offices and also on various propositions, including Proposition 19. Prop 19 was a ballot measure to modify Propositions 13 and 58.
Background
Proposition 13 passed in 1978. It limited property tax increases to 2% annually unless reassessed due to sale or other transfer. As a result, many properties in California have a property tax assessment far lower than the current fair market value.
Proposition 58, passed in 1986, allowed a property owner to pass along their primary residence (and up to $1 million in assessed valuation of other property) to their children at their preferential property tax assessment. (This was expanded by later proposition to qualifying grandchildren.)
California law also allowed an eligible homeowner (over age 55, severely disabled, or the victim of a natural disaster) to move once to a participating county in the state and bring their assessed valuation with them if they were moving to a home of lesser value.
Proposition 19
The new Prop 19 modifies the existing laws ushered in by Propositions 13 and 58. First, it allows eligible owners (over age 55, severely disabled, or the victim of a natural disaster) to move anywhere in the state up to three times to a home of lesser value and bring their property tax assessment with them. While that’s great for homeowners, Prop 19 also modifies the law regarding inherited properties.
Prior to Prop 19’s effective date, property owners can leave their primary residence and up to $1 million in assessed value of other real estate to their children (and qualifying grandchildren) and the assessed value would transfer with the property.
After Prop 19, the preferential assessed value can only transfer if:
- it’s for the primary residence (and no other real estate), and
- the child (or qualifying grandchild) is going to use it as his or her primary residence, and
- the fair market value doesn’t exceed the assessed value by more than $1 million. So, after Prop 19, the transfer of other property, such as rental property or commercial properties, would face reassessment to fair market value at the time of the transfer.
Let’s look at an example:
Mary owns her primary residence, currently worth $1 million, and with an assessed value of $300,000. She pays $3,600 per year in property taxes on her primary residence. If the property were reassessed at fair market value, the property taxes would be $12,000 per year. Mary also owns a rental property assessed at $250,000 and worth $1.2 million. Mary pays $3,000 per year in property taxes on the rental property, but if it were assessed at the fair market value, the property taxes would be $14,400. Mary has one child, Jason, to whom she will leave her properties.
Before the application of Prop 19, Mary could leave both these properties to Jason and he’d continue to pay the same property taxes Mary would have. The property taxes would only increase up to 2% per year, just as they would with Mary.
After the effective date of Prop 19, if Mary transferred the rental property to Jason, it would be reassessed at fair market value and Jason’s property taxes would go from the $3,000 Mary would have paid to $14,400. Similarly, if Mary transferred her primary residence to Jason, it would be reassessed at fair market value and the property taxes would increase from $3,600 to $12,000 per year, unless Jason used it as his personal residence.
Planning Relating to Prop 19
What can be done about this? Prop 19 is effective for transfers after February 15, 2021. So, Mary could transfer the properties to Jason before that date and the old law would still apply. In other words, Jason would not face reassessment of the properties to their fair market value and he would not have to live in the residence as his family home.
Mary could transfer these properties to Jason outright. However, an outright transfer could make the properties vulnerable in the event of Jason’s divorce or other problems such as exposure to his creditors and predators. It could also result in the loss of the often very valuable “stepped up” tax basis for capital gains taxes when the property is later sold.
An effective transfer to Jason in specialized trust could avoid many of these issues. (Note: a standard revocable “living trust” will not suffice.) However, any such transfer must be made by February 15, 2021. Any transfers after that date, whether outright or in trust, would be subject to the rules of Prop 19. Of course, when Jason later transfers these properties again (after February 15, 2021) due to his death or other reasons, Prop 19 will apply and the properties would be reassessed at fair market value at that time unless the family home exception in Prop 19 applied.
Action Steps
Prop 19 may have serious, unwanted consequences for certain families. For those that are interested in further exploring Prop 19 issues and/or taking action before the February 15, 2021 deadline, we will be offering consultations via Zoom or in our Sacramento office on a first come, first serve basis. The cost for the consultations will be $750. This fee will be credited towards any specialized trust work that the client chooses to move forward with at the conclusion of the consultation.
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