estate planning

California Proposition 19

California Prop 19 eliminates Parent Child Reassessment Exclusion but Expands Base Year Value Transfer


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.

Background

1978 Prop 13

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.

1986 Prop 58

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.

2020 Prop 19

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.

Exception - Child's New Residence

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.

While there is nothing positive about the loss of the parent-child exclusion, there is a second part to Prop 19, which is helpful to many Californians. 

California Prop 19 allows homeowners who are 55 years or older, severely disabled, or the victim of a natural disaster to transfer the tax base of their California home to a rep

What is the California Prop 19 Base Year Value Transfer?

Proposition 19 allows those 55 years or older, severely disabled, or the victim of a natural disaster to sell their home and transfer their existing Proposition 13 property tax basis to a new home anywhere in California, for any price, that is purchased or built within 2 years of the sale of their original home.

This change is significant because the replacement of a property is no longer required to be of equal or lesser value to qualify for these tax savings. 

Who Qualifies for the New Exclusion?

Previously, to qualify for Base Year Value Transfers, the new home had to be in the same California county as the original home, and the new home’s value had to be equal to or less than that of the new one.

As of April 2021, the value of the new home can be higher than the previous home as long as the increase in value is added to the transferred taxable value of the old home. If the full cash value of the new home is of equal or lesser value than the original home, the assessed value of the new home will be the assessed value of the original home.

You may qualify for a Base Year Value Transfer if all of the following conditions are met:

  • The original home and new home must be located in California.
  • The Seller or the Seller’s spouse must be 55 years or older, be permanently or severely disabled, or a victim of wildfire or other natural disasters.
  • The original property must have been eligible for the Homeowners’ Exemption (i.e., was the primary residence) or entitled to the Disabled Veterans’ Exemption.
  • The new home must have been acquired or newly constructed within two years of (before or after) the sale of the original home.
  • You must file an application within 3 years following the purchase date or new construction completion date of the new home.
  • The original home must be subject to reappraisal at its current FMV. In other words, you must sell your original home, you cannot gift it to children or others.
  • This exemption for taxpayers over 55 or disabled is limited to 3 transfers during your lifetime.

Conclusion

These laws are complex and constantly changing. If you are concerned about how Prop 19 will affect you and your family, you should consult an experienced estate planning attorney to discuss the consequences of Prop 19 and find the best solution for your unique circumstances.

 

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