California’s Proposition 19, the Home Protection for Seniors, Severely Disabled, Families, and Victims of Wildfire or Natural Disasters Act, passed late last year. The portion of the bill that has major implications for property taxes concerning parent-child or grandparent-grandchild exclusions in the state is going into effect on February 16, 2021. If you are planning on transferring property to a child or grandchild, here are the things you need to know about this new law.
What is Proposition 19?
Proposition 19 is a law passed in November 2020 that allows an owner of a primary residence who is over 55 years of age, severely disabled, or a victim of a wildfire or natural disaster, to transfer the taxable value of their primary residence to a replacement primary residence located anywhere in the state. According to the bill, “The measure would limit a person who is over 55 years of age or severely disabled to 3 transfers under these provisions.”
Before Proposition 19
Proposition 19 replaces 1978’s Proposition 13. Prior to the passage of Prop. 19, a parent could transfer their primary residence to their child without a new fair market reassessment on that property. As an example, if a home bought in 1940 for $50,000 is valued at $1 million today, the annual property tax under Prop. 13 is closer to the $50,000 (adjusted for inflation) price than the current $1 million fair market value. The child could use that property as their primary residence, a vacation home, or a rental property. After February 16, 2021, this is no longer the case and could affect a child or grandchild’s decision to keep the property or sell. (See a comparison chart here of the changes due to Prop. 19)
The exception to this is that, if the child or grandchild chooses to live in the property as their primary residence, then up to $1 million of reassessed value will be excluded from the new property tax basis.
Implications for Proposition 19: Keeping the Property
If the property tax changes due to Prop. 19 directly affect your situation, it is a good idea to talk to your estate planning attorney and/or financial planner to see what can be done before the law goes into effect on February 16. Paperwork needs to be filed with the county clerk to ensure that the property tax basis is preserved (this is especially crucial if a parent or grandparent has recently passed).
Another possibility is to consider gifting the property before February 16, especially if you know you want to keep the property tax base, but you also know your child or grandchild will not be using the property as a primary residence. This option has pros and cons associated with it: For example, doing so might allow the beneficiary to continue paying the lower property taxes each year. However, this will affect the inheritor’s step-up in basis.
If you want to sell
If your family is planning on selling the property, rather than keeping it, upon the death of a parent or grandparent, then no planning is necessary. The property will receive a step-up in basis at that time and the beneficiaries will be able to sell with little to no gains.
Questions about Proposition 19
If you have questions about Proposition 19, we advise you to speak with your financial planner and estate planning attorney in depth so that your unique circumstances can be addressed. The deadline for this is February 15, 2021. On February 16, 2021, this new law goes into effect. Contact us today to discuss.
The Team at Chatterton & Associates
Although the information has been gathered from sources believed to be reliable, it cannot be guaranteed. Federal tax laws are complex and subject to change. This information is not intended to be a substitute for specific individualized tax or legal advice. Neither Royal Alliance Associates, Inc., nor its registered representatives, offer tax or legal advice. As with all matters of a tax or legal nature, you should consult with your tax or legal counsel for advice.