California Proposition 19 passed with just over 51% of the vote in the general election on November 3rd and is expected to become law. This new law has two separate effective dates:
- February 16, 2021 – For beneficiaries of real estate that use the property as a primary residence.
- April 1, 2021 – For transferring a property tax assessment to a new location within the state of California.
Rules governing inherited properties and tax assessment transfers will change. Transfers before these dates will not be subject to these changes.
Under current California property tax law, when a property changes ownership, the assessed value of the property is set at the then current fair market value. For most properties, the current fair market value is equal to the purchase price. The property’s assessed value cannot increase by more than 2% per year until another change of ownership (or new construction) occurs.
However, under special exemption rules, the current law allows parents to pass certain property to their children and avoid reassessment to current fair market value. In essence, current law allows parents to transfer certain property and the existing (low) assessed value of that property to their children without triggering any property tax increase. Parents may currently give their children
- a principal residence of ANY fair market value, plus
- the first $1 million of the assessed value of any other type of real property, without triggering property tax reassessment.
For properties that have been in the family for many years, this can preserve a low property tax base for another generation.
California Proposition 19 eliminates the $1 million exemption entirely. This means any property other than a principal residence that is transferred from a parent to a child will be reassessed, with the assessed value reset to the property’s fair market value. Under the new law, for a property that becomes the principal residence of the child, there will be an upward adjustment in the tax assessment if the fair market value of the property exceeds the assessed value by more than $1 million.
KROST Insight:
California residents who have thought about transferring either a principal residence or other real property with a low assessed value to their children should consider doing so before February 16, 2021, in order to obtain the benefits of the current law.
Proposition 19 will also increase the number of times certain taxpayers can transfer the tax assessment from one to three. Those eligible for this benefit are individuals over 55 and those with severe disabilities. Victims of natural disasters will retain the one-time property tax assessment transfer. The property tax assessment transfer of taxable value must be completed within two years of the sale of the former principal residence. Eligible taxpayers can transfer a property tax assessment to a replacement property anywhere within the state, which is changed from previously that only allowed participating counties. The transfer of a tax assessment to a new principal residence with the same or lesser value than the former principal residence will carry the original taxable value. The transfer of a tax assessment to a new principal residence with a greater value than the former principal residence will include an upward adjustment. The upward adjustment will generally be the difference between the selling price for the former principal residence and the purchase price for the new principal residence.
Gifting should be done before the end of 2020 to protect against a reduced retroactive lifetime exemption exclusion that could be implemented next year, under a new administration. The exemption is currently $11.58 million for lifetime gift and estate tax exemption. These amounts could be reduced to 2009 levels of $3.5 million for estate tax exemption and $1 million for lifetime gift tax exemption, with the top rate for the estate tax at 45%.
Do you have questions about Proposition 19? Our team of experts can assist you. Contact us today.
About the Authors
Matthew Weber, CPA, MAcc, Director
Tax, Financial Services Sector, Hospitality
Matthew Weber is a Director at KROST. He has been with the firm’s tax practice since July 2015 and has worked in public accounting since 2010. Before joining the firm, Matthew was a Tax Manager at PricewaterhouseCoopers in Los Angeles. Matthew’s areas of expertise include federal and multi-state tax compliance and consulting for individuals, corporations, and partnerships. » Full Bio