In November of 2020, Proposition 19 was approved by California voters. While there are several benefits to this new property tax law, there is also a potential detrimental impact to homeowners who are counting on the protected property tax benefits of Proposition 13 and Proposition 58 which exempts most parent/child transfers from reassessment.
The advertising was simple; eligible homeowners would have the ability to transfer their tax basis anywhere within the State and to a property of greater value. Additionally, the increased revenue or net savings resulting from the ballot measure would benefit wildfire agencies and impacted counties! A win/win scenario until you take into consideration where the extra revenue might come from.
Mainly overlooked by voters who were enticed by the previously mentioned selling points, there is a less publicized component of Proposition 19 to be aware of now that it has been signed into law. As a result of Proposition 19, we have lost the parent/child exemption from reassessment for all transfers between parents and children, save one. A parent is allowed to transfer their owner-occupied residence to their child and avoid reassessment provided the child uses that same home as their primary residence. The moment that a child ceases occupancy, the home is reassessed. Further, only the first $1 million of the assessed value is excluded from reassessment. All other transfers will cause a reassessment and thus an increase in property taxes. Family farms have a small exception as well, but that is not discussed herein.
Given the above, if your estate planning strategy was to pass along a property to your child upon your death and the exemption isn’t met, the impact of this new law is that your child will be forced to pay higher taxes based on the newly reassessed property value going forward. As an example, if your property that you purchased in 1980 had an annual tax bill of say $1200 based upon the protected 1980 assessed value provided under Proposition 13, that bill might increase tenfold or more when the property is reassessed upon your passing depending upon what the new assessed property value is.
When to Act
Proposition 19 becomes law effective February 16 of this year. Given the compressed timeframe available to take action, any planning strategy that involves re-deeding of a property needs to take place at least one business week ahead of that date to ensure that the recording is completed in a timely manner. Time is of essence to ensure that you are not locked into a tax situation that you have no control over.
The estate planning legal community has been mulling over potential mitigation strategies for the past six weeks or so as the reality of the tax impact of Proposition 19 has set in and more guidance has become available from the Board of Equalization. There are options ranging from simple to complex depending upon your goals. If this is a concern, please contact us to help you determine how to achieve your goals.