California Proposition 19 ("Prop 19")
Proposition 19 ("Prop 19") on the November 2020 ballet has passed bringing with it significant changes to reassessment exclusions available to California property owners.
Current Law
To understand the impact of Prop 19, one first needs to understand the current system of property taxation under Proposition 13 ("Prop 13"), passed in 1978 and subsequent propositions. California real estate is given an assessed value equal to the market value of the property whenever there is a change in ownership of the property unless a reassessment exclusion applies. Furthermore, the increase in assessed value of real estate is limited to 2% per year. The net result of this system and the appreciation of California real estate is that owners who've held on to property for a long time pay relatively little in property taxes as compared to recent purchasers of real estate.
California, through the passage of Proposition 58 ("Prop 58") allowed property owners to transfer their primary residence and the first $1 million dollars in assessed value of other real estate to their children without re-assessment. This allows children to continue paying the low property taxes that their parents did despite staggering increases in market value of the inherited property. A similar law applies to transfers between grandparents and grandchildren.
Proposition 19
Prop 19 brings two major limitations to reassessment exclusions on transfers of real estate between parents and children (and grandchildren). First, only the transfer of a primary residence to a child that continues living in the property as his or her primary residence qualifies for the reassessment exclusion. Second, assuming that the property remains the primary residence of the inheriting child, the reassessment exclusion is only available to the extent that the market value at the time of the transfer does not exceed the assessed value of the property by more than $1 million. Stated differently, if the market value of the property exceeds the assessed value by $1 million or more, the assessed value will be the market value of the primary residence minus $1 million. If the market value of the property is less than $1 million over the assessed value, then the parents' assessed value can be passed on to the child. The new law will affect transfers beginning on February 16, 2021.
Prop 19 has another component that is largely taxpayer friendly and limits property tax increases on primary residences for seniors, the severely disabled, and wildfire and natural disaster victims. This is accomplished by allowing these taxpayers to transfer the assessed value of their current primary residence to a replacement property in any county of California, subject to certain limitations.
If you are considering transferring California real estate to your family as part of your estate planning, transferring the properties prior to February 15, 2021 may allow you to utilize the benefits of the existing law prior to the effective date of Prop 19. There are numerous factors involved in making this decision, so you should contact your estate planning attorney or a property tax specialist to ensure that you are making an informed decision.
Below are some helpful resources for you to learn more about Proposition 19:
California Secretary of State - Voter Information Guide on Prop 19