Proposition 19 was passed in November’s election by an approximate 51% of the vote. It will go into effect February 16, 2021, but before it does, it is important that you understand the current law, the new law, and how the changes could affect your estate planning decisions.
Under the law that is currently in place, a parent may transfer ownership of his or her personal residence to a child without the property being reassessed for tax purposes, regardless of how the child uses the residence. The child or children may use the property as a personal residence, a vacation home, or a rental property. This is called a parent-to-child exclusion. The parent-to-child exclusion has worked since its inception to allow children to inherit their parents’ property without triggering tax reassessment to fair market value of the real estate. An example of how this works is as follows:
Parents buy a home in San Mateo for $100,000 in 1970. Current property taxes are approximately $1,200. In 2020, Parents transfer ownership of the home to their two adult children. The home is now worth $2,000,000. The home would not be reassessed for tax purposes upon transfer, and the property tax would remain at $1,200 (plus the incremental increase in property taxes that all homeowners face per year).
In contrast, the new law would disallow the exclusion of property tax reassessment on a transfer from a parent to a child (with an exception- see below). Property taxes would therefore be assessed at the fair market value of the home, bumping up the tax liability from approximately $1,200.00 per year to approximately $24,000.00 per year. This reality hits the Bay Area somewhat differently than it does in other parts of California due to the high appreciation of home values across our 5 main counties. These numbers are merely an example, and in some circumstances, tax liabilities will reach much higher dollar amounts. But the practical result is this: If a child or children would like to keep the home, they will be subject to the new tax amount, which might not be feasible for their budgets. The children would therefore be forced to sell their inheritance, which is in many cases an unintended result.
It’s worthy to note that there is an exception to this change in rules. This reassessment will not be triggered if the child/children use the residence as their own primary residences. However, there is a cap of $1,000,000 on the exclusion amount. Using the example above, only $1,000,000 of the $1,900,000 in appreciation would be excluded from property tax reassessment. Also, there are complicating factors: What happens when there is more than one adult child? Will those children need to share the inherited home as their primary residence? What if the property in question is not a home, but rather an income-generating property?
These changes discussed above will perhaps be the most widely-felt part of the passing of Proposition 19, though there are further nuances and things to consider when determining a plan of action. Please contact our office as soon as possible if you wish to discuss how Proposition 19 will affect your specific situation.