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Proposition 19 Makes Major Changes to Property Taxes on Property Transferred to Children and Grandchildren
On November 3rd, 2020, the California voters approved Proposition 19 which may have major impacts on your plans to pass your California real property to your children or grandchildren. I am writing to alert you to the potential effects of Proposition 19 on property taxes when real property is transferred to children and grandchildren.
Background
Proposition 13 keeps property tax low on real property. Proposition 58 allows the low property tax to pass to a child for the primary residence as well as the first $1,000,000 of assessed value of all other property. Proposition 193 allows some property transfers to grandchildren to keep the low property tax amount.
Changes Made by Proposition 19
Though Proposition 19 does not change Proposition 13, it makes significant changes to Propositions 58 and 193, essentially eliminating the transfer of the lower tax basis for any property except for the primary residence.
The general Proposition 19 parent to child or grandchild transfer rules are:
Except for the primary residence, all transferred properties will be reassessed causing an increase of property tax.
The primary residence will be reassessed unless the child lives in the home.
Even if the child lives in the home, if the fair market value of the property on the date of death is the assessed value plus $1,000,000, there will be a reassessment of the excess over the assessed value plus $1,000,000.
Increase of Property Taxes for Property Other
Than the Primary Residence
Family vacation homes, rental properties, second homes, or any other real property in California outside of the primary residence will be reassessed when transferred to children or grandchildren causing an increase of property tax. In essence, Proposition 19 will increase the property tax on millions of properties transferred to children or grandchildren.
Possible Solutions
There are a few strategies that may avoid the increase of the property tax, but any action must be completed by February 15, 2021. Possible solutions are:
Gifting properties outright to children or grandchildren;
Placing properties in an irrevocable trust; or
Placing properties in a limited liability corporation.
It is important to seek professional guidance on any of these options as each solution may have other tax consequences.
Time is of the Essence!
Because the Parent/Child and Parent/Grandchild transfer provisions of Proposition 19 take effect on Tuesday, February 16, 2021, parents must act immediately to take advantage of the current family friendly rules. Please do not wait to speak with your tax or trust & estate professional!
Where to Find More Information on Proposition 19
For more information on Proposition 19, visit the Board of Equalization website (www.boe.ca.gov/prop19/) which provides a comparison of the current law and the upcoming changes.
If you have questions or would like to fully explore your options, please contact me at 510-629-4404 or kday@dayseiterlaw.com to make an appointment.
I wish you the very best in 2021!