Prop 19 Passes
Means Changes to California Property Tax Rules
On November 3rd, California voters narrowly passed Proposition 19. Although the results have not yet been officially certified, the proposition is leading with about 51% of the votes at the time of this writing. Prop 19 changes the way property taxes are assessed for family transfers of real estate in California.
First, let’s look at some history – Proposition 13, the ‘old’ law.
In June of 1978 California voters passed Proposition 13, which placed a 2% annual limit on increases in the assessed value of real estate when calculating property tax. Real estate could only be reassessed beyond the yearly 2% when there was a change in ownership. In subsequent elections, California voters passed exemptions on most transfers of real estate from parents to children (and in some cases to grandchildren). Later, voters also approved limited exemptions specifically for homeowners age 55 or older.
Generally, under the old law a parent could sell, gift, or bequest real estate to their child(ren) without triggering a property tax reassessment (if the property was their personal residence regardless of its fair market value, or other real estate up to $1 million of assessed value). The $1 million limit was based on the county’s assessed value of the property, not the property’s fair market value. This meant that real estate worth millions of dollars could potentially be transferred to a child with no property tax reassessment.
Also, under the old law, if you were over age 55 and sold your primary residence, you could keep your property tax basis if you moved to a less expensive home in our own county, or a small number of other California counties. This was allowed only once in a lifetime. If the replacement home were too expensive, you could not transfer the property tax basis, and the new home would be reassessed to the higher purchase price of the new residence.
These provisions of the old law were especially beneficial when families had held California real estate for many years, as the increase in property values far exceeded the 2% increase in annual property tax assessments, resulting in significant yearly savings in property tax.
Now, let’s look at Proposition 19, the ‘new’ law:
Sales or transfers of real estate from parents to children will trigger an immediate reassessment of property taxes, with one exception: to prevent reassessment, the child must move into the property and use it as their primary residence within one year of the sale or transfer. Also, the property must have been used by the parent as their primary residence before the sale or transfer. A maximum of $1 million in fair market value is protected from reassessment, and any excess value will be subject to reassessment.
Transfers of all real estate other than a “family home” to a child will trigger an immediate property tax reassessment. Commercial property, raw land, and rental property transferred from a parent to a child will trigger a reassessment, with no exceptions. These changes will be effective February 16, 2021.
Homeowners who are over age 55 can, under Prop 19, transfer the property tax basis in their primary residence to their new primary residence anywhere in California within two years of the sale of their original residence. The replacement property can be more expensive than the original property, but the difference in price will be added to the tax basis of the original property. Also, under the new law, there can be three such transfers during an owners’ lifetime. Note that these “age 55” provisions will be effective April 1, 2021.
Under both the new law and the old law, there is an application form that must be timely filed with the appropriate county in order to utilize an exclusion from reassessment.
Income tax and gift tax considerations:
Under current federal and California law, gifts of property generally result in no change in cost basis for income tax purposes. Property that is inherited gets a step-up in cost basis to the value as of the date the previous owner passed away. Property that is gifted is not subject to federal gift tax if the donor’s lifetime gifts are less than $11,580,000.
However, this could all change in 2021. There is talk of eliminating the step-up provision, and perhaps reducing the lifetime gift tax exclusion to $1 million. This leaves a unique period from now until December 31, 2020, to consider making strategic gifts of California real estate to children.