New proposal threatens California real estate tax haven


Homeowners have seen their homes rise in value dramatically in most parts of the country over the past few decades, and in most cases the assessed value of property taxes has kept pace with the increase in the real value of the property. property itself. But not in California.

The reason for this is Proposition 13, which was approved by California voters in 1978, sparking a nationwide debate over property tax overrun. Under the proposal, a base year value going back to 1975 was set, property taxes were limited to 1% of assessed value, and increases were limited to a maximum of 2% each year. While no other state has approached the issue in the same way as California, Prop 13 has remained in effect ever since, despite attempts to overturn it.

“It seems unlikely to consider California a tax haven,” said Carol Kao, CPA, lawyer and partner in the private client and tax team at the San Diego office of international law firm Withers. “Property values ​​were rising so rapidly in the 1970s that people were forced to leave their homes. They therefore adopted Proposition 13 to keep the increase at a low rate unless there is a change in ownership. It allowed people to keep their homes.

Now Proposition 19, which was added to the California ballot in June, threatens to change critical aspects of Proposition 13.

“This would change the current parent-child exclusions,” said Yin Ho, senior business partner in the San Francisco office of Withers.

Under the principal residence exclusion, parents can transfer a principal residence of unlimited value to their children without triggering a reassessment. In addition, there is a lifetime non-primary residence exclusion of $ 1 million ($ 2 million for a married couple), which allows the transfer between parents and children of up to $ 2 million assessed value of all. other types of property, such as second homes, rental properties and commercial properties.

“Proposition 19 would completely eliminate the non-primary residence exclusion,” Ho said. “To qualify for the primary residence exclusion, the child who received the property would be required to use it as their primary residence. of the child, and the amount of the exclusion would be limited to $ 1 million in assessed value. ”

Will Proposition 19 pass when voters vote on November 3, 2019?

“It’s too early to tell,” says Ho. “There is a consensus that any attempt to modify Proposition 13 will meet a lot of resistance. If voters do not understand the measure or do not see keywords such as “change,” there is usually a lot of opposition. The last time a similar measure was offered, it was lost in double digits.

“Taxpayers generally don’t approve of a proposal that would raise taxes,” Kao agreed. “But they cleverly packaged this one to make it appealing to some voters. And its name alludes to fighting forest fires, so it looks more appealing. He can gain traction, especially for those over 55, so he can actually get enough votes. “

“Proposal 19 contains a measure that makes it favorable to people over 55 who wish to transfer the property tax value of their primary residence upon sale to a new replacement residence,” Ho said. “This would allow seniors. move to a new, more valuable home and take the current property tax base with them. They could do it three times in their lifetime, but can only do it once under the current law. And it can be done in any county in California, whereas under current law the county must participate in portability rules, and not all counties do. “

Kao gave a personal example. “My parents bought a house in the early 1970s for $ 60,000. It’s now worth $ 1 million, and my mom would like to downsize following my dad’s death. Under the current law, she would not be able to take the value with her in a downsized home.

Taxpayers should think about planning ahead, according to Kao and Ho.

“The timing is interesting because of the national elections,” Kao said. “Depending on the election results, the exclusion from inheritance and gift tax could be significantly reduced, whereas it is currently at an all time high. Planning whether or not to acquire a new qualifying property is an additional problem. There are a lot of layers and technical details that should be taken into account.


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