Impact of California Proposition 19 on Estate Planning and Gifting of Real Estate | Wendel Rosen LLP
California Proposition 19, a constitutional amendment for property tax transfers and exemptions, was approved by voters in the November 2020 election. It is the most dramatic change to property tax protections since the passage of the law. Proposition 13 in 1978. Landowners need to understand the property tax consequences of Proposition 19 and its impact on California families.
Proposition 19 is primarily concerned with two groups of Californian landowners. Proposition 19 provides property tax relief to homeowners 55 years of age or older, people with disabilities, or victims of forest fires or natural disasters. These people can transfer the assessed value of their main residence to a replacement residence of equal or lesser value, if they move anywhere in California.
If the replacement principal residence is worth more than the original residence, the assessed value of the replacement property is increased by the difference between the full cash value of the new principal residence and the original principal residence. The possibility of transferring the assessed value of a primary residence can be used up to three times.
This tax advantage comes at the expense of the second group of taxpayers, the children (or qualified grandchildren) who receive California real estate by gift or bequest. Generally, the assessed value of a property is reassessed based on the fair market value of the property at the time of transfer. However, the pre-Prop-19 rules allow the transfer of real estate between parents and children (or qualifying grandchildren) without reassessment of the property tax. This exemption allows parents to transfer a primary residence of unlimited assessed value, plus up to $ 1 million assessed value for all other real estate, while their children retain the low assessed value enjoyed by parents. The advantage applies whether the transfer of real estate takes place during the lifetime of the parent or upon the death of a parent. The beneficiary can use the property as they wish, either as vacation property, rental property or as a residence.
This generous tax relief for donated or inherited real estate is severely limited under Proposition 19. Proposition 19 requires the child who receives a principal residence to use the house as their principal residence within one year of receiving it, in order to request the reassessment exemption. The new owner must apply for the owner’s exemption (or the disabled veteran’s owner’s exemption) within one year of the transfer.
The transferred homes that are not used as primary residences will be reassessed to their fair market value for the purposes of calculating the annual property tax. Proposition 19 also eliminates the additional $ 1 million in other real estate that can be transferred without reassessment.
Even if a transfer qualifies for the principal residence exemption for the parent-child transfer, there will be a partial revaluation if the principal residence has a fair market value greater than its assessed value plus $ 1 million. For these properties, the formula for calculating the new assessed value is: Existing Assessed Value + (Fair Market Value – $ 1 Million – Current Assessed Value). For example, if, at the time of the transfer, the principal residence has an existing assessed value of $ 500,000 and a fair market value of $ 1,750,000, the assessed value of the residence to the new owner will be $ 750,000. Effective February 16, 2023, the $ 1 million amount is adjusted annually at a rate equal to the change in the California home price index.
Proposition 19 also retains the low taxable value for parent-child transfers from family farms, if the property continues to be used as a farm. Family farms are defined as real estate used for grazing, grazing or farming.
In addition, the exemptions of the property tax reassessment proposal 19 apply to transfers between eligible grandparents and grandchildren (when the parents of the grandchildren are deceased) and to transfers “upstream” of the children. to parents. But because transfers from parents to children are more common, this article focuses on parent-to-child transfers.
In order to keep a low property tax base for the next generation, parents with vacation homes or rental properties may wish to transfer the properties to their children by February 16, 2021, when Proposition 19 comes into effect. .
However, parents should keep in mind that any real estate transferred during the parents’ lifetime will have their deferral tax base. If the property has appreciated since the purchase, the transfer can result in a significant capital gains tax when the children later sell the property. The donated property will not benefit from an increase in the fair market value income tax base, which the children would have received had they inherited the property. Depending on the size of the parents’ estate and the value of the property, the desire to minimize income tax may outweigh the property tax savings, especially if the property is sold after the parents die.
If the parent / donor wishes to continue using the property after its transfer, they will have to pay rent to the new owners, which could result in taxable income for the new owners. If a rental property is transferred, the rental income now belongs to the new owner. In addition, when several owners are co-owners of the property, they must have a written agreement for the management of the property in order to minimize conflicts.
Decisions about donating real estate are further affected by the donee’s plans to live in the property, hold and lease the property, or sell the property. Potential donors should also assess the overall size of their estate, the value of the assets they plan to transfer, any tax payable on donations, and the need to complete a donation tax return to report the donation. Family dynamics, the risk of family conflicts and relationships between siblings and in-laws must also be taken into account.
As the effective date of Proposition 19 approaches, there is a limited window for transfer tax planning options. Clients are encouraged to consult with Wendel Rosen’s Estate Planning Team to implement a plan based on each client’s estate planning goals and to make the most of available property tax, as well as opportunities for gift and inheritance tax.
 The assessed value is defined as the base year value of the property plus the annual increase allowed under California Proposition 13. The assessed value is used by the county assessor‘s office to calculate the amount of property tax owed each year.