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Property Tax Transfers

On Behalf of | Nov 8, 2022 | Estate Planning |

Property Tax Transfers and Proposition 19

The Home Protection for Seniors, Severely Disabled, Families, and Victims of Wildfire or Natural Disasters Act, or Proposition 19 (Prop 19), was approved by voters in California in November 2020. Prop 19 has several parts. It changes the rules of Prop 58, regarding the transfer of property between parents and children or grandparents and grandchildren. It also changes the assessment process for other homeowners.

One part of Prop 19 is beneficial for qualifying homeowners, while the other potentially increases the tax obligations of people who inherit property. Learn more about the new rule and what it means for property tax transfers and inheritance in California.

What Is Prop 19 in Simple Terms?

Proposition 19 is an amendment to the Constitution of California, and it does two things.

First, it provides a real estate tax benefit for certain homeowners — those over age 55, individuals who have disabilities or people who lost their homes in a disaster, such as a wildfire or an earthquake.

Second, Prop 19 affects real property transfers between family members. If a parent or grandparent wants to pass on their home to a child or grandchild, the person inheriting the property needs to live in the house to avoid having the property reassessed for tax purposes.

The parent-child and grandparent-grandchild portion of Prop 19 took effect on February 16, 2021. The base year value transfer portion of Prop 19 — the part impacting older, disabled or displaced homeowners — took effect on April 1, 2021. Transfers of property made after those two dates are subject to the new law’s terms.

How Does Prop 19 Change Taxation of Family Property Transfers?

Before Prop 19, family property transfers in California were subject to the rules of Proposition 58 (Prop 58) and Proposition 193 (Prop 193). Under Prop 58, if a parent transferred their property to their child or children, they would also transfer the property’s tax assessment. For example, a parent might leave a property with a $1 million fair market value and a $300,000 tax assessment to their child.

Before Prop 19, the inherited property would retain its $300,000 tax assessment, whether the child decided to live in it or not. After Prop 19, the child would need to live in the inherited home within one year of the transfer — if the home’s fair market value at the time of transfer was less than $1 million — to keep the tax assessment. If they decided not to live in the house, the property would be reassessed. Reassessment would most likely increase the taxable value of the property.

Prop 193 created a similar situation to that of Prop 58, but for grandchildren who inherited property from grandparents. Under Prop 193, any property inherited by grandchildren would retain the grandparent’s tax assessment value, whether the grandchild lived in the property or not, so long as the children of the grandparents were deceased as of the transfer date.

Prop 19 adds another layer to tax assessment. Under Prop 19, the value limit is the sum of the factored base year value plus $1 million. If the market value exceeds the value limit, partial relief comes into play. Anything exceeding the excluded amount is added to the factored base year value.

Suppose the fair market value of the inherited property is $1 million or more than its assessed value. In that case, the property will be reassessed, but $1 million will be subtracted from the reassessed value. For example, if a child inherits property from their parents with an assessed value of $400,000 and a fair market value of $2 million, the property would be reassessed at $1 million ($2 million minus the $1 million exclusion).

Does Prop 19 Affect Inheritance?

Prop 19 impacts inheritance, as it can potentially affect the assessed value of properties children or grandchildren inherit from their parents or grandparents. Any change in an inherited property’s assessment can lead to a hefty tax bill for the person inheriting.

Prop 19 affects how much in tax reassessment a person will have to pay, which becomes costlier depending on how many properties someone inherits. Previously, any property passed down from parent or grandparent to child or grandchild was subject to the assessment exclusion. Whether the property was the primary residence, a rental or another commercial property, the child would inherit the property’s assessed value.

Under Prop 19, only the assessed value of the primary residence gets passed down, and only if it’s less than $1 million and the inheritor makes the property their primary residence within one year of the transfer. If a child inherits a rented apartment building their parents, the building will be reassessed and they’ll need to pay tax on the current assessed value.

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Does Prop 19 Affect Property Held in Trust?

Prop 19 can affect property held in trust, mainly if there is a change in trust ownership. For example, if a parent leaving real property to their child creates a revocable trust that becomes irrevocable upon their death, that counts as a change in ownership. The change in ownership can make the property subject to the rules of Prop 19.

Consider a parent with a revocable trust leaving their real property in trust to their child at their death. At their death, the trust becomes irrevocable and the interest in that real property vests in their child. The California Revenue and Taxation Code views the date of the parent’s death as the date of transfer for that property — for transfers occurring on or after February 16, 2021.

Is Prop 19 Retroactive on Inherited Properties?

There is good news for people who have already inherited properties from parents or grandparents. Proposition 19 is not retroactive. Any property transfers that took place before the rule went into effect on February 16, 2021, are not affected. Transfers on or earlier than February 15, 2021, were subject to Prop 58 or Prop 193.

How Do You Avoid Property Reassessment in Prop 19?

If you are concerned about the reassessment of inherited property under Prop 19, you can take steps to potentially avoid leaving your heirs a hefty tax bill. The first thing to do is consult with an experienced estate planning attorney who can explain your options to you.

A couple of options are to gift the property to your child or children before you die or establish an irrevocable trust to transfer ownership of the property. Another option is to establish a business with your children and transfer ownership of the property to the business. Over time, your attorney may suggest you relinquish larger ownership interest in the company to your children.

How Does Prop 19 Work for Seniors and Other Individuals?

While Prop 19 can increase the tax burden on people who inherit property, it offers notable tax benefits to older individuals, people with disabilities and people affected by disasters.

Under Prop 19, eligible people can transfer the assessed value of their current home to a newly purchased property anywhere in California. For example, a person currently owns a house with a fair market value of $950,000 and an assessed value of $400,000. They buy a new home for $900,000. Since the price of the new home is less than the fair market value of the original property, the person can transfer the assessed value ($400,000) to the newly purchased property.

If they bought a home with a market value above the market value of the original property, the assessed value would be the difference between the two home’s prices, plus the assessed value of the original property. The difference in market values is added to the transferred base year value. For example, if they sold House A for $950,000 and purchased House B for $1.5 million ($1.5 million minus $950,000 equals $550,000), the assessed value of House B would be $950,000 ($400,000 plus $550,000).

How to Qualify for a Prop 19 Tax Base Transfer

You need to meet certain criteria to qualify for a tax base transfer under Prop 19:

  • Be over age 55 (you or your spouse) or
  • Be disabled or
  • Have lost your home in a wildfire or another natural disaster

Whether you meet one or several qualifications, you must purchase or build the new property within two years. It can be anywhere in California.

The tax base transfer portion of Prop 19 applies to homes sold or purchased after April 1, 2021.

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Barulich Dugoni & Suttmann Law Group Can Help You Handle Property Transfer in California

Prop 19 can mean higher property tax bills for people who inherit property in California. With estate planning guidance and advice, you can minimize the tax burden on your heirs. The experienced estate planning attorneys at Barulich Dugoni & Suttmann Law Group can help you navigate Prop 19 and ensure your heirs get the most from their inherited property.

To learn more, contact us to schedule a consultation today.