Proposition 19: How does it Affect You and I
Proposition 19, amends our Constitutional Amendment No. 11. It is a complex California ballot proposition that appeared on our recent election and passed with just over 51%. This Property Tax proposition changes property tax portability and property tax transfer parent/grandparent to child/grandchild.
A fact to be aware of: Property Tax in the state of California is 1% of the assessed value plus any local fees and bonds. The Assessed value is based on the original purchase price and then the assessed value has a maximum increase of 2% annually. This is Proposition 13.
The proposition will increase the property tax burden on owners of inherited property in favor of providing expanded property tax benefits to homeowners ages 55 years and older, disabled homeowners, and victims of wildfires and natural disasters. According to Legislative Analyst, Proposition 19 will increase net tax revenues by “hundreds of millions of dollars per year." Seventy-Five percent of the increase property tax will go to The Fire Response Fund to help fire suppression staffing and full-time station-based personnel. The Proposition does change proposition 13, does away with prop 58 and 90.
Currently homeowners ages 55 years and older, disabled homeowners, and victims of wildfires and natural disasters are allowed to transfer their property tax of a primary residence to a another primary residence in 9 participating counties with certain price limitations and only once in their lifetime. Proposition 19 allows these homeowners to keep their property tax for a replacement primary residence, Anywhere in the state, Regardless of the value of the replacement primary residence (with adjustments if "greater" in value), Within two years of the sale, Up to three times (but without limitation for those whose houses were destroyed by fire).
The two provisions regarding the value of a replacement principal residence.
(1) Equal or Lesser Value: The replacement primary residence is of equal or lesser value, subject to an inflation index of 105% if purchased within one year of sale, and 110% if purchased within the second year of sale of the original property. The tax basis of the original principal residence may transfer to the replacement principal residence.
(2) Greater Value: The replacement residence is of greater value. The taxable value of the replacement primary residence is calculated by adding the difference between the full cash value of the original primary residence and the full cash value of the replacement primary residence to the taxable value of the original primary residence.
Ex: Original Primary Residence (OPR) taxable value . . . $400,000
OPR sold for . . . . . . . . . . . . . . . $900,000
Replacement Primary Residence (RPP) purchase . . . . $1,000,000
Difference between sale price of OPR and purchase price of RPP is . $100,000
Taxable Value of RPP is $400,000 plus $100,000… $500,000
Now the Other part Prop. 19 Eliminates Most Parent-Child Property Tax Exemptions Beginning Feb 16, 2021
Current law allows parents to transfer certain property and the existing (low) assessed value of that property to their children, without triggering any property tax increase.
Parents may currently give their children
(a) a principal residence of ANY fair market value, plus
(b) the first $1 million of assessed value of any other type of real property, without triggering property tax reassessment. For properties which have been in the family for many years, this can preserve a low property tax base for another generation.
Prop. 19 does two things. First, it eliminates the $1 million option entirely. This means that any type of property other than a principal residence which is passed from a parent to a child would be reassessed, with the assessed value reset to the property’s current fair market value.
Secondly, to transfer a principal residence from parents to children.
(a) the child is only able to claim the property tax reassessment exemption if the child lives in the residence; and
(b) if the current fair market value of the residence exceeds the current assessed value of the residence by more than $1 million, the residence will be partially reassessed.
Prop. 19 will take effect on February 16, 2021. If you have thought about passing either a principal residence or other real property with a low property tax value to your children you should consider doing so before February 16, 2021, in order to obtain the benefits of current law. Although time is limited please do not do this without talking to your financial advisor, tax accountant, or estate attorney. It has lots of consequences. By transferring now, the children inherit the low property tax, but they also inherit the low-cost basis which will have a major tax consequence when they sell. It may trigger gift tax issues. There is no Right or Wrong solution. Each situation is different. In some instances, it may be financially beneficial to transfer property to children now but in many cases it may not be beneficial. I think it depends on the age/health of the parents, the assessed value, the cost basis, the complete estate valuation, the family dynamics, stability of children, and so much more. Please talk to an advisor before making any changes.
Here is a link to the Board of Equalization’s breakdown: https://www.boe.ca.gov/prop19/
Here is a link to a video on the affects of Proposition 19: https://tinyurl.com/yy35n8jt
I am here to answer any questions to the best of my ability.