Billed as “The Property Tax Transfers, Exemptions and Revenue for Wildfire Agencies and Counties Amendment,” in November 2020, California voters passed Proposition 19, impacting property tax benefits for Californians. Below is a summary of some of the non-exhaustive key features that Prop 19 gives and takes away.
1.What are the basic concepts at issue?
Property taxes are calculated by multiplying a property’s “assessed value” by the state’s property tax rate. The higher a property’s assessed value, the more in property taxes an owner must pay. Prop 19 changes the way the assessed value is calculated in certain situations.
Basis in a property is how much one paid for a property, and the amount is critical when selling a property since the taxes paid on the gain on the sale of property are calculated by subtracting the basis from the sale price. The lower a property owner’s basis in the property is at the time of sale, the greater the gain. Therefore, property owners generally prefer having a higher basis when selling a property to avoid higher capital gains taxes
2. What is Prop 19 and who does it affect?
Prop 19 is essentially split up into two parts. The first part addresses the parent-child exclusion for reassessment of property taxes. The effect is that children receiving property from their parents may have to pay higher property taxes. The second part adds benefits for certain “disadvantaged” individuals by allowing them to preserve a lower basis/assessed value on the property, and thus lower property taxes.
3. Part 1: What is the parent-child exclusion and how does Prop 19 change it?
Under current law, effective until February 15, 2021, a parent could transfer a) their primary residence regardless of value, or b) up to $1 million of assessed value (per spouse) for any type of real property, to their children without reassessing the property’s value for property tax purposes. This allows the children to pay the same property taxes their parents paid by using the parents’ basis to calculate property taxes (generally lower) instead of the fair market value.
Prop 19 completely eliminates the parent-child exclusion for all properties other than a primary residence, such as rental properties or vacation homes, resulting in the property’s value being reassessed at the market value at the time of transfer to the child for property tax purposes. This can potentially lead to the child paying significantly higher property taxes than their parents.
For the transfer of primary residences from parents to children, Prop 19 limits the exclusion from reassessment to $1 million per spouse. If the market value of the property exceeds $1 million, the property will be partially reassessed in the amount that exceeds $1 million. Additionally, to claim this exclusion, the child must use the property as his or her primary residence within one year of transfer.
4. What should I consider or take action on before the deadline of February 16, 2021?
If a child plans on selling a property after he or she receives it from his or her parents through inheritance or transfer, then there may potentially not be a need to take action since the child won’t be paying property taxes after selling the property. However, if the child plans on holding the property, renting it out, or using it as a vacation home, then it may potentially be beneficial to preserve his or her parent’s lower basis by taking action immediately before February 16th and locking in the lower property tax liability. While simply transferring the property to the child from now might seem like a good option, the parent should consider whether they are willing to lose control of the property and the child should consider such things as whether the property will be subject to the child’s creditors and whether the child will inherit the parent’s lower basis, potentially resulting in higher capital gains when selling the property (as opposed to passing the property to the child upon death and receiving a stepped-up basis and in turn reducing capital gains tax liability upon future sale).
5. Part 2: What are the potential benefits of Prop 19?
The second part of Prop 19 applies to homeowners over the age of 55, the severely disabled, or those who lose a home to a wildfire or natural disaster. Effective April 1, 2021, these eligible homeowners may transfer the basis in their primary residence to a new home they move to, up to three times. So, after moving, even to a more expensive home, these eligible homeowners pay property taxes based only on the basis of their original home. However, if the new primary residence is more expensive than the original one, then only up to an additional $1 million in value (compared to the basis of the original primary residence) may be excluded from the assessed value of the new home for property tax purposes.
Understanding the consequences and moving parts of Proposition 19 can be tricky. The attorneys at Bezdik Kassab can assist you with navigating through the options when considering the impact of Prop 19 on your estate. Contact the Bezdik Kassab Law Group today for a no cost consultation.
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