Filing estate tax return and electing portability when first spouse dies could eliminate future estate tax if the gift and estate tax exemption drops.
California Proposition 19
California Prop 19 eliminates Parent Child Reassessment Exclusion
In November 2020, Californians approved Proposition 19, with most voters not knowing the repercussions. Prop 19 was steamrolled through the legislative oversight and vetting process with a big push by the California Association of Realtors and was dubiously marketed as helping fire victims. What it did was eliminate one of the most valuable property tax breaks for California families - the parent child reassessment exclusion.
A quick history. In 1978, Californians approved Proposition 13. Prop 13 froze property taxes at 1% of 1975 assessed values, and prevented increases of more than 2% per year - unless there is a change in ownership. If there is a change in ownership, the county assessor can reassess the property and reset the property tax for the new owner at the new assessed value. For example, if the 1975 home value was $50,000, the property tax would have been $500 per year. If the home was sold for $200,000, the new owner's property tax would be $2,000 per year.
In 1986, Californian's approved Proposition 58. Prop 58 prevents reassessment and increase of property taxes for a transfer from parent to child. Here's how Prop 58 worked: Let's say your parent's home had a $50,000 assessed value with a tax of $500 per year, and when you inherited their home it was worth $500,000. If the home was reassessed, the property tax would increase to $5,000. But with Prop 58, it stayed the same.
Before Prop 58, many families had to sell the family home when mom and dad died, because the children couldn't pay the increased property tax. Prop 58 helped California families keep the family home in the family.
Now comes Prop 19, which essentially eliminates the parent child reassessment exclusion. Under Prop 19, when children inherit their parent's home, the home is reassessed to current market value and the property tax goes up. There is one exception. If one of the children move in to their parent's home and the child makes it his or her residence, the property tax will not go up, so long as the new assessed value is not more than $1M more than the old assessed value. But if the children intend to make the home a rental or a second home, they must pay the higher tax.
If the children intend to sell their inherited home, they will have to pay the increased property tax starting from parent's date of death until the date the house is sold. If one of the children move in and makes it his or her home, the property tax could stay the same. But if they want to keep the home, whether as a rental or a second home, the property tax will go up. This part of Prop 19 is not good, unless you are the realtor who gets to sell the family home.
There is a second part to Prop 19, which is helpful to many Californians. I'll explain the Assessed Value Transfer in my next post.