Prop 19: Good; Bad; Ugly

Proposition 19 has passed in California as revealed by the election results.

GOOD:

Great news for all homeowners who are over 55 (or who meet other qualifications). Prop 19 is generally beneficial to homeowners. Prop 19 expands the class of people who qualify for a transfer of their taxable value from their current home to a new property. Such owners will be eligible for property tax savings when they move, in other words they’ll be able to relocate anywhere within California and carry their old home’s Prop 13 assessed value with them. Only inherited properties used as primary homes or farms would be eligible for property tax savings. Basically, you take your old home value with you when you sell & buy a new house in California.

BAD:

Extra efforts must be put in your estate planning because starting February 16, 2021 (actual deadline is Feb11, 2021), the measure narrows the special rules for inherited properties. Specifically, the measure:

• Ends Special Rules for Properties Not Used as a Home or for Farming. The special rules would apply only to two kinds of inherited property. First, the rules would apply to properties used as a primary home by the child or grandchild. Second, the rules would apply to farms. Properties used for other purposes could no longer use the special rules.
• Requires Tax Bill to Go Up for High Value Inherited Homes and Farms. The property tax bill for an inherited home or farm would go up if the price the property could be sold for exceeds the property’s taxable value by more than $1 million (adjusted for inflation every two years). In this case, the tax bill would go up but not as much as it would if the property were sold to someone else.
• If your home has increased in value significantly from its taxable value, Prop 19 adds certain limitations that could result in an increased assessment. If the increase in value is less than or equal to $1,000,000 no adjustment is made. However, if the increase in value is more than $1,000,000 the increase in value after the first $1,000,000 is added to the tax assessed value. For illustration purposes: let’s assume a family home has a current taxable value of $3,000,000. Because the parent purchased the home several years ago, its value is now $5,000,000. Thus, it has increased by $2,000,000. The new reassessed value if the parent gifts the home to her child or if parents pass away will be $4,000,000. 

UGLY:

Since parent to child (or grandchild) transfers are eliminated (with exception: parent to child transfer of a home by gift/inheritance BUT the child must occupy this property as their primary home) a property will be reassessed when there is a change of ownership occurs.  For rentals, it means they are going to be reassessed when transferred at death of the original owner. This means that your residential rentals, commercial rentals, industrial rentals, vacation homes will be reassessed at death.

An obvious question comes in the mind of many clients: “What if I just gift my real estate away now?” – You lose control over it. Your basis carries over to your child (as capital gains tax), subject to child’s divorce, lawsuits, and bankruptcy, loss of rental income and your child may die before you do so it’ll pass according to their designations.  

Prop 19 will change some of our current strategies and create new opportunities for us to assist our clients. Please contact The Baner Law Firm if you have any questions or concerns regarding your specific estate plan and Prop 19 or call: (650) 383-7663