The recent presidential election was one of the most hotly contested in years and brought voters out in record numbers. While the result of that contest has not been certified, some consequences of the election have been confirmed. In California, the electorate narrowly passed Proposition 19 which is expected to result in meaningful consequences for some homeowners as it relates to their property tax bill,
The passage of Prop 19 will result in changes to both Propositions 13 and 58 which were passed in 1978 and 1986, respectively. Prop 13 restricted property tax increases to 2% annually unless the property was reassessed due to sale or other transfer. Many California residents have enjoyed the property tax protection afforded by Prop 13 as the fair market value of their property skyrockets. Proposition 58 allows a property owner to give their primary residence and up to $1 million in assessed valuation of other property to their children at their current assessed value. This proposition allowed children to inherit property from their parents and grandparents while keeping the same property tax base.
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 keep their assessed valuation if they were moving to a home of equal or lesser value.
IMPACT of PROPOSITION 19 in CALIFORNIA
Effective April 1, 2021, if you are a homeowner meeting any one of the following requirements
- Over age 55;
- severely disabled; or
- The victim of a natural disaster
you may move anywhere in the state up to three times to a home of equal or lesser value and transfer your current property tax base to that home. This option is particularly beneficial for property owners who want to downsize once their children have grown, have suffered a job loss or endured a death of a spouse.
With respect to the estate planning world mot all results of Prop 19 will be positive One negative result of Prop 19 is a limitation on how much property parents may pass to their children (or grandchildren) without reassessment. Prior to Prop 19’s effective date (February 16, 2021) a property owner can leave their primary residence and up to $1Million in assessed value of real estate to their children (or grandchildren who are eligible) and the assessed value would move with the property.
Once Prop 19 goes into full effect, the parent-child (grandparent-grandchild) exclusion from reassessment for transferred properties other than a “family home” will be eliminated. That is to say, unless the child (or grandchild) intends on using the property as his or her primary residence, the exclusion is not allowed. The transfer of other property, such as commercial properties or rental properties would result in reassessment to fair market values at the time of transfer. Consequently, the net effect for some children inheriting property from their parents will be the burden of large, possibly untenable, tax bills.
Prop. 19 also reduces the parent-child exclusion on a primary residence or “family home” from an unlimited amount to one million dollars above the current assessed value. As such, even if a parent transfers his or her primary residence to their child who also uses it as a primary residence, that child could face an increased tax liability depending on the assessed value of the property.
In light of the foregoing one can surmise here will, no doubt, be huge implications for California homeowners once Prop 19 goes into effect. There is, however, a potential remedy. One possible solution for homeowners would be to transfer property outright, or in trust, by February 15, 2021 to their desired recipient. If that course of action is followed the property owner’s beneficiary may be able to avoid the negative impacts of Prop 19 such as reassessment or being forced to live in the transferred property.
If you are currently facing this dilemma, Michael Sullivan & Associates would love to evaluate your current plan to determine if we can help. MS&A offers free consultations and are ready to assist with your estate planning needs.