By Tyler P Krueger, Associate Attorney
The Home Protection for Seniors, Severely Disabled, Families, and Victims of Wildfire or Natural Disasters Act
This article and accompanying infographics seek to explain how Proposition 19 makes significant changes to the parent-to-child and grandparent-to-grandchild property tax reassessment exclusions and some important information you should know if you think you will be impacted by the change in law.
Background on Property Taxes and Proposition 13
To understand the significance of Proposition 19, it is important to understand Proposition 13 and California’s property tax transfer rules. Proposition 13 became law in 1978 and established two important rules for calculating property taxes. The first rule established a new base year value for property taxes upon a new purchase. The base year value is the value that is used to calculate a property owner’s property taxes. The second rule restricted the annual increases of property taxes to incremental percentage increases year after year.
Essentially, Proposition 13 froze the base year value for calculating property taxes and prevented property taxes from increasing as the value of a property increased. Again, this only occurred when a property was purchased.
Example of the Impact of Proposition 13 on Property Taxes Over Time
In our example above, a person purchases a property for $100,000.00 in 1980. Under Proposition 13, the property taxes on this property are calculated based on that $100,000.00 purchase price. This would equate roughly to $1,250.00 in property taxes.
Fast forward 40 years to 2020. This same property is now worth $1,500,000.00. The property taxes for this property are still based on the $100,000.00 purchase price from back in 1980 because of Proposition 13. The base year value at the time of purchase was frozen at $100,000.00 and adjusted with incremental increases every year. Even though the property is worth $1,500,000.00, the property owner is still only paying roughly $2,250.00 in property taxes.
Transferring the Base Year Home Value
Given our example above, could a property owner transfer their low base year value for property taxes to their child? The answer is a resounding YES.
Normally, when a property is transferred, that would result in a Change of Ownership and would result in a property tax reassessment. This means a new base year value is established based on the new purchase price. Under this logic, a parent who transfers a property to their child would cause a property tax reassessment and the child would have to pay higher property taxes. Proposition 58 and Proposition 193 created two important exceptions to this rule.
Proposition 58 allows a Parent to transfer their base year value in their property to their children using two reassessment exclusions. The first is the Primary Residence Exclusion. This allows a parent to transfer their base year value in their primary residence to their child, no matter how low or how the base year value. The second is the $1 million Exclusion. This allows each parent to transfer up to $1 million ($2 million collectively) in base year value for any non-primary residence properties to their child. The $1 million Exclusion is collective and not for each property, meaning a person can transfer as many properties as long as their collective base year value is below $1 million.
Proposition 193 allows a Grandparent to transfer their base year value for property taxes to their grandchildren under the circumstances but also has more specific requirements to qualify.
Proposition 19 - What Has Changed?
Proposition 19 makes significant changes to the property tax transfer rules for transfers between a parent and child.
Under Proposition 19, a parent can transfer their base year value in their primary residence to their child ONLY if that child claims it as their primary residence as well. Otherwise, the property will be reassessed. Additionally, the property might still be partially reassessed if the base year value, plus $1 million, is greater than the fair market value of the property.
The other major change is that Proposition 19 removes the $1 million exclusion for non-residential property. In other words, all vacation homes, rental homes, family homes, etc., will be reassessed if they are transferred from a parent to a child.
Proposition 19 - Who Does It Impact?
Clearly, Proposition 19 makes significant changes to the property tax transfer rules for transfers between parents and children. Who does Proposition 19 impact?
Property owners that might be impacted by the change in transfer rules are parents with multiple properties, such as a family home, vacation home, or rental home etc., and older parents who want their children to inherit their real estate. Additionally, anyone with an estate plan that relies heavily on the old property tax transfer rules are likely going to be impacted as well.
Solutions to Proposition 19 Dilemmas
The last day to make a transfer under the old property tax transfer rules is February 15, 2021. And while there is no “one size fits all” solution to solve the issues presented by Proposition 19, every case is different and you should consult with your attorney about your options.
Individuals that are significantly impacted by Proposition 19 will likely require complex planning using a combination of irrevocable trusts and limited liability companies if they want to preserve their base year value.
Another possible solution would be to gift your property to your child now, but only if this option makes sense for your situation. Again, you should consult with your attorney to discuss the advantages and disadvantages of gifting a property now.
If you have any questions, the attorneys at Rusconi, Foster & Thomas are prepared to answer your questions and assist you in navigating Proposition 19.
Rusconi, Foster & Thomas, APC
We're located in Morgan Hill, California serving Santa Clara, San Benito, Santa Cruz, and Monterey Counties since 1956.