Unlike residents of some other states, Californians are privileged to have several favorable rules regarding property taxes. The biggest advantage is Proposition 13 – the initiative passed by voters in 1978 to keep people from being priced out of their homes by runaway property taxes. Under Proposition 13, the annual real estate tax on a parcel of residential property is limited to 1% of its “assessed value”. This assessed value, approximately 20% of the fair market value, may only be increased by a maximum of 2% per year as long as there is no change of ownership. For people who bought their homes before property doubled or tripled in value, their property taxes are relatively low, and care must be taken to preserve this low property tax rate.
2020 saw two State ballot initiatives aimed at property taxes. Proposition 15, which sought to repeal Proposition 13, received a lot of attention and opposition. As a result, it was firmly defeated by voters. Meanwhile, Proposition 19 was flying under the radar. It was not well understood by the average person and received a fraction of the opposition funding that Proposition 15 received. Its major selling point was that tax dollars would go towards wildfire response. It passed by a 51.1% majority. Depending on a variety of factors, Proposition 19’s effect on any individual could be deemed good, bad or ugly.
The Good: A person, who is 55 years of age or older, disabled, or a wildfire victim may sell his or her primary residence and transfer their property tax basis to a replacement property. The property must be purchased within 2 years of sale of the primary residence, the value of the purchased property can be of any amount and the property tax basis can be transferred to any county in California. This can be done up to 3 times in a lifetime (although it is limited to one time for fire victims). Prior law limited the counties to which the transfer could be made and only applied where the new property was of equal or lesser value.
The Bad: It is a common occurrence for children to inherit property from their parents and the current law provides an exemption on reassessment for transfers between parents and children. Thus, with certain exceptions, under current law property transferred to children after the death of their parents does not trigger a reassessment of the principal residence (of any value) and up to $1,000,000 of the assessed value of other real estate. Under Proposition 19 all property held by the parent except the principal residence will be reassessed when a parent dies. This could have a catastrophic impact on those who inherit income properties because a substantial increase in the property taxes affects the bottom-line profitability of continuing to hold the property.
The Ugly: Most of my clients only have one property that they wish to leave to their children – the family home. Under Proposition 19 the parent-child exclusion applies for the transfer of a parent’s principal residence to a child only if the child uses it as his or her principal residence. If there is more than one child that inherits the property, there is an inference that all the children must live there! The homeowner’s exemption must be applied for within one year of the transfer (not 3 years as in prior law) and the exclusion is further limited to the house’s assessed value plus one million dollars.
Proposition 19 goes into effect on February 16, 2021 and applies to the estates of all persons dying after that date. In the meantime, trust and estate law practitioners such as myself are scrambling to find ways to minimize the detrimental impact of Proposition 19 on their clients.
© 2020 by Marlene S. Cooper. All rights reserved.
(You may obtain further information at the website www.marlenecooperlaw.com, by e-mail at MarleneCooperLaw@gmail.com, by phone at (626) 791-7530 or toll free at (866) 702-7600. The information in this article is of a general nature and not intended as legal advice. Seek the advice of an attorney before acting or relying upon any information in this article).