On Tuesday, November 3, 2020, the California voters passed Proposition 19 which will have a significant effect on everyone’s ability to transfer the current property tax assessment to your children or, in some cases, your grandchildren. Proposition 19 had two major provisions that affect property tax.
First, it limits property tax increases on the primary residences by removing relocation restriction transferring your current property tax assessment to a new residence under certain circumstances for homeowners who are severely disabled, victims of wildfires or other natural disasters, or seniors over 55 years of age. Previous law allowed certain homeowners to transfer the current property tax assessment when they bought a new home if both counties participated in the program. Proposition 19 allows these certain homeowners to transfer the current property tax assessment statewide. This is a good thing as it allows seniors and others to have more flexibility in choosing their home.
Second, Proposition 19 alters and eliminates the Parent Child Transfer property tax protections established by Proposition 13 and Proposition 58. Currently, the current property tax assessment is reassessed to the fair market value whenever the title to the property is transferred or sold with a few exceptions. One of these exceptions is the parent-child transfer established under Proposition 58. This included both homes and commercial properties in some instances.
Starting February 16, 2021, Proposition 19 requires that in order to transfer the current property tax assessment of a home between parent and child the property must be the principal residence of both the parent and the child. Therefore, it the child does not move into the family home within one year of inheriting the property, the current tax assessment will be reassessed. Also, rental and vacation homes will be reassessed.
For example, a parent who has one child owns a home worth $1,000,000 and it has a current property tax assessment valued at $350,000. The parent currently pays say $4500 a year in property tax, including local assessments. If the property is reassessed it would be approximately $12,500.00 including local assessments. Before Proposition 19, the parent could transfer this property to her child and the property tax would be the same. After Proposition 19, the property would be reassessed to $12,500.00 unless the child used it as his/her primary residence. If the child uses the property as a primary residence, they can keep the tax basis.
Also any rental, commercial or vacation homes will be reassessed if a parent transfers them to their child after February 15, 2021.
Consider Transfers To Your Children Before February 15, 2021
Because the Parent Child Transfer provisions of Proposition 19 do not take effect until February 16, 2021, there is a small window to do some tax planning to see if gifting property from parent to child is a good idea at this time. However, it would be a good idea to discuss all
the consequences of such a transfer including Capital Gains Tax, Gift Tax, the possibility that Gift Tax will change starting January 1, 2021 with the new presidential administration and property tax itself.
Please consider all of your options for transfers of your property to your children prior to Proposition 19 going into effect. Don’t let Proposition 19 eliminate your property tax protections without considering all of your legal and tax consequences.