If you have real property that you are intending to pass to your children, you should know that after February 16, such a transfer will lose benefits that are available now under the law. Let me explain…
Proposition 19 passed on the most recent California ballot. The amendment takes effect early next year. Here is what Proposition 19 does:
- Provides a new property tax break for homeowners 55 and older who sold their homes and acquired new, more expensive residences.
- Severely narrows the exclusion from property tax reassessment for real property transfers between parents and their children.
The way it has been is that a parent can transfer a principal residence to a child regardless of market value, and the child gets the same property tax value in the hands of the parent. Such a transfer is exempt from triggering a property tax reassessment to current market value and it applies whether the child uses the property as his/her principal residence or converts it to rental property. That means today, a child could receive a parent's principal residence with an assessed value of $500,000 and keep that value for property tax purposes, even if the residence was worth $5 million when inherited or gifted.
In addition, current law also provides a parent-child exclusion for transfers of up to $1 million in assessed value of other property, such as rentals. That means today, a child can inherit a rental property from a parent with an assessed value of $500,000 and keep that property tax basis, even if such property was worth $10 million (because up to $1 million of assessment value of other property may pass from a parent to a child without reassessment).
Proposition 19 materially narrows the ability between parents and children to transfer real property without triggering a property tax reassessment.
Here are the ways that Proposition 19 limits the benefits of parent/child real estate transfers:
1. For transfers on or after February 16, 2021, a child acquiring a parent's principal residence (whether by gift or by inheritance) must use it as his or her own principal residence.
2. The unlimited exclusion in value under the old law has been significantly rolled back. Under the new rules, the parent-child exclusion for a principal residence only excludes an additional $1 million of value over the assessed value at the time of transfer (to be indexed for inflation). Thus, a transfer of a principal residence with a fair market value in excess of the assessed value in the hands of the transferor parent plus $1 million will result in a partial property tax reassessment.
For example, let’s assume a principal residence was worth $3 million at the time of transfer, and the old taxable value (the assessed value in the parent's hands) was $500,000. Under Proposition 19, the property gets partially reassessed to a new taxable value of $1.5 million ($3 million full cash market value minus the old taxable value of $500,000 and the $1,000,000 additional exclusion).
Because the new law is effective for transfers on or after February 16, 2021, parents may wish to gift their residence to a child before then to preserve the old property tax base, if circumstances otherwise warrant.
3. Proposition 19 also totally eliminates the "other property exclusion" for transfers of up to $1 million of adjusted base-year value for non‑principal residence property made on or after February 16, 2021. After that date, such transfers will result in a total reassessment to fair market value.
The good news:
4. Under prior law, older homeowners could retain only their existing property tax assessed value if they moved to a home of equal or lesser value in either the same county or in one of the 10 counties permitting intercounty transfers. And this was a one‑time opportunity.
The new law lets homeowners over 55, as well as victims of wildfires and other natural disasters, buy a replacement property anywhere in California and port over their existing property tax base, even if the new residence is more expensive. Older homeowners can do this up to three times.
CONCLUSION
Proposition 19's passage substantially reduced the available property tax benefits of a parent-child principal residence transfer. Under the old law, a residence of unlimited value could be transferred without triggering reassessment, but this is no longer the case after February 15, 2021.
If you are thinking about transferring real property in California to your family for estate planning purposes, making the transfer on or before February 15 may enable you to preserve the property tax value under the existing exemption limits.
Proper estate planning can keep your family out of conflict, out of court, and out of the public eye. If you’re ready to create a comprehensive estate plan, contact us to schedule your Family Wealth Planning Session. Even if you already have a plan in place, we will review it and help you bring it up to date to avoid heartache for your family. Schedule online today.