CA – Proposition 19 – By far, the proposition with the greatest impact for California homeowners coming out of the recent ballot measures was Proposition 19.
CA Proposition 19 significantly changed existing law regarding property tax reassessment for homeowners. Depending on your perspective, there’s good news and bad news to come out of this recent change. The good news is that California law now allows eligible homeowners who are either over the age of 55, severely disabled, or the victim of a natural disaster to move anywhere in the state, up to three times into a home of equal or lesser value and apply their property tax assessment to the new home.
Proposition 19 was meant to modify the previously passed Propositions 13 and 58. The controversial Proposition 13 limited property tax increases to 2% annually unless reassessed due to sale or some other transfer. The consequence of those propositions was that for many properties in California there was a property tax assessment which was far lower than the current fair market value of the property.
Proposition 58 allowed a property owner to pass on their primary residence (plus an additional $1 million in assessed valuation for any other real property) to their children and grandchildren at a preferential property tax assessment rate.
The bad news coming out of Proposition 19 is the language in the proposition which changes the law regarding properties which are to be inherited by children and grandchildren. The new law under Proposition 19 states that the preferential assessed property tax valuation can only be applied if: a) the property in question is the primary residence of the property tax payer; b) the child or qualified grandchild is going to use it as their primary home; c) the property tax reassessment exclusion should only be applied to the extent that the fair market value doesn’t exceed the assessed value by more than $1 million. Rental real property would be totally excluded under Proposition 19 and upon transfer to children and grandchildren, those properties would be reassessed for property tax purposes.
Let’s look at an example: Tami owns her primary residence, currently worth $1 million, and has a county assessed value of $300,000. She pays $3,600 per year in property taxes on her primary residence. If the property were reassessed at fair market value, the property taxes would be $12,000 per year. Tami also owns a rental property assessed at $250,000 and worth $1.2 million. Tami pays $3,000 per year in property taxes on the rental property, but if it were assessed at the fair market value, the property taxes would be $14,400. Tami has one child, Evelyn, to whom she will leave her properties.
Before the application of Proposition 19, Tami could leave both these properties to Evelyn and Evelyn would continue to pay the same property taxes Tami would have. The property taxes would only increase up to 2% per year, just as they would with Tami. After the application of Proposition 19, if Tami transferred the rental property to Evelyn, it would be reassessed at fair market value and Evelyn’s property taxes would go from the $3,000 Tami would have paid to $14,400. Similarly, if Tami transferred her primary residence to Evelyn, it would be reassessed at fair market value and the property taxes would increase from $3,600 to $12,000 per year, unless Evelyn used it as her family home.
Is there a way to offset this problem? Proposition 19 is effective for transfers after February 15, 2021. So, you could transfer the properties to your child before that date and the old law would still apply. In other words, your child would not face reassessment of the properties to their fair market value and the child would not have to live in the residence as his or her family home.
You could also transfer these properties to your child outright. However, an outright transfer could make the properties vulnerable in the event of your child’s divorce or other problems. A transfer to your child in a trust could avoid many of these issues. However, any such transfer must be made by February 15, 2021. Any transfers after that date, whether outright or in trust, would be subject to the restrictions of Proposition 19. Of course, when your child later transfers these properties again (after February 15, 2021) due to his or her death or other reasons, Proposition 19 would still apply and the properties would be reassessed at fair market value at that time unless the family home exception in Proposition 19 applied.
Will Proposition 19 have a negative impact on your family? Perhaps you should consider whether a transfer of your California realty by February 15, 2021, makes sense for you.
If you have questions about the impact of CA Proposition 19, call our office at 626-403-2292 or for more information, visit our website at www.LosAngelesTrustLaw.com.
Attorney William K. Hayes is a noted speaker on the subjects of Living Trusts, Wills, and Long-Term Care Planning.
His newspaper columns on estate planning topics have been syndicated throughout Southern California. The Hayes Law Firm has been cited as a resource for estate planning answers by NBC, CBS, ABC and FOX.
Mr. Hayes is also an active member of the American Academy of Estate Planning Attorneys which is highly recommended by Consumer Reports, Money Magazine, and Suze Orman, as a top resource for locating highly qualified estate planning attorneys.
CA Proposition 19 – Summary
Everyone had eyes on the election at the top of the ticket. But other races and state propositions may have had as much impact on people’s lives. California’s Proposition 19 is an example of this. It alters how property taxes are capped in California. Read on to learn more about Proposition 19 and the planning you could do now before Proposition 19 would go into effect in February 2021.
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