URGENT PROP. 19 STRATEGIES

URGENT PROP. 19 STRATEGIES

If you own any real estate in California–residential or otherwise–the property tax caps imposed by Proposition 13 can play a dramatic role in your life. Unfortunately, few California residents realize just how complex and dramatic that role may be.

Prop. 19 Radically Alters Prop. 13 Rules on Inheritance

The situation has again been dramatically altered by the passage of the landmark California tax Proposition 19 on the November 2020 ballot. Many may have decided to support Prop 19 without realizing its full implications. When implemented on February 16, 2021, California Prop 19 will, with limited exceptions, eliminate a parent’s ability to leave to their children or grandchildren their Proposition 13 taxes and tax base. All property will be reassessed at its current fair market value, with one very small exception. Indeed, Proposition 19 should force an urgent rethinking of tax strategies for any property owner with children.

Quick Summary: What is Prop 13 California?

Proposition 13, which passed overwhelmingly in 1978, was an amendment to the California Constitution which rolled back residential property taxes on a principal residence to 1975 levels, capping them at 1% of assessed value (plus some local additions by county). Assessments were allowed to rise at a maximum of 2% a year—even though real estate prices in California continued to skyrocket. Properties would be fully reassessed in value only when a change of ownership occurs either by death, gift, or sale. In other words, when the property is “transferred,” or what the California State Board of Equalization calls a “change in ownership.”

Proposition 13 California Tax Caps Matter a Lot to a Family’s Intergenerational Wealth–Many Traps Await the Unwary

Here’s a real-life example. A house in Los Angeles County was purchased in 1992 for $475,000. In 2020, that house is now market-valued at about $2.8 million. But thanks to Prop 13, along with the various amendments and political pressures, it’s currently assessed at only $670,615, with an annual property tax of $8,986. If this house were transferred to a relative as part of an estate without proper planning (say to a sibling, or starting February 21, 2021 to a child), it could be reassessed at say $2.5 million, with an annual property tax rate around $35,200 for the unwitting heir! “Hey sis, I’m giving you a house…and a $35,200 a year tax bill.”

Consider Urgent Action Before CA Prop 19 Takes Effect February 16, 2021

The passage of Proposition 19 on the November 2020 ballot radically altered the Prop 13 tax landscape in California, and every California property owner should at least consider taking immediate, urgent action before the law takes effect.

This includes every single-family, multi-family, commercial, or industrial property owner with children or grandchildren. Up through February 15, 2021, a parent can continue to transfer their home, commercial property, or rental property of any value to their child, and the low Prop 13 capped property taxes will generally transfer with it subject to limitations. If transferred prior to implementation of the new law, the child does not have to then live on the Property.

But starting on February 16, 2021, the only Prop 13 tax base that can be transferred is that of your primary home to your child—and then your child themselves must live on the property as the owner. If that’s not enough, if the home is worth more than a $1M, the home may be partially or entirely reassessed! A partial or complete loss of your Proposition 13 tax benefit.

In most cases, this will effectively eliminate the ability of a parent to leave a low tax assessment to a child. Why? Because very few people who inherit their parents’ home will actually want to live in that home—and many homes are worth far more than $1M in California. That makes Proposition 19 a huge departure from current California law, with massive consequences for taxpayers who own California real estate.

Prop 19 Also Changed the Rules for People Over 55

Prop 19 also changed the law to let eligible homeowners transfer their tax assessments anywhere within California, and lets tax assessments be transferred even to a more expensive home, with an upward adjustment. People over 55 can now do this three times during their life instead of just once. Other eligible people include those with severe disabilities.

High Chance of Error Demands Expert Legal Advice

We haven’t the space to detail all the ways that people mess up their Proposition 13 assessment caps—even during their lifetimes. If you have the slightest question about a transfer of property in a Living Trust or otherwise, we urge you to consult a competent California attorney.

Source : Cunningham Legal 30