Proposition 19 was passed in November 2020 by California voters. This proposition was marketed to voters as a way to protect the property tax basis of a primary residence for seniors 55+, those who are severely disabled, and victims of wildfire and natural disasters, but what they didn’t tell you was that it also essentially eliminated the parent/child exclusion which protected families from high property tax reassessments. The law went into effect on February 16, 2021. We asked San Diego Real Estate Attorney, Ashley Peterson with Ashley Peterson Law to provide more information on this new legislation and how it will impact real estate transfers.
Under the previous law, a parent could transfer any property they own in California to their child, and the child would receive the benefit of the parent’s low property tax value since the parent to child transfer is excluded from property tax reassessment. This means that if a parent bought a property in the 1970s and has a tax basis that was extremely low, the child would be able to assume those low property tax payments once they took title to the property. This also applied in the same way for grandparent to grandchild transfers, however for the grandparent/grandchild exemption, both parents of the child were required to be deceased to qualify. (Note: I should point out that parents who do these transfers to their kids for no consideration (zero dollars) will likely incur a gift tax depending on the value of the transfer).
Now under Prop 19, a parent may only transfer their primary residence of up to $1 million dollars to their child, and the child will be required to live in the property as their primary residence for the transfer to be excluded from property tax reassessment. Primary residence means the parent filed a claim for homeowner’s property tax exemption for the residence. The child must move into that property within 1 year of the date of transfer and must claim a homeowners’ exemption as well. Any transfer between parents and children that are not the primary residence (i.e. investment, vacation or rental properties), or transfers where the child does not intend to live in the property as a primary residence, the property will be reassessed at current fair market value as of the date the deed is recorded. This will result in significant increases in property tax payments for intra-family transfers of real property on a large scale. What it also means is if a child inherits a property from their parent’s trust on the death of the parent (where the death occurred after February 16, 2021) and the property was not the decedent parent’s primary residence, the property tax will be reassessed as of date of death if the children don’t live in the property as their primary residence. So trust transfers of properties on death are no longer exempted.
Keep in mind that even partial transfers could trigger a reassessment. If a parent transfers 50% to their child so they are 50-50 owners on title, and the property is not a primary residence of either the parent or the child, the property will be reassessed 50% at fair market value.
After April 1, 2021 under Prop 19, Seniors 55+ and severely disabled persons have the ability to purchase a new principal residence anywhere in California (up to 3 times), and transfer their lower property tax basis from their existing property to their new property. The new property must be of equal or lesser value to the property being sold to avoid any partial property taxes owed. There is a similar provision for victims of wildfire and natural disasters.
While the downside to children inheriting the property through their parent’s trust on the death of their parents will result in a property tax reassessment at fair market value (if not the primary residence), the benefit the kids get is that they receive the property at fair market value as of date of death (also known as a “step up in basis”). This means that if the child sold the property after the date of death of the parent, the capital gains taxes would be extremely low, if any at all. Also, the estate tax for 2021 is capped at $11.7 million, so there is a strong possibility no estate taxes will be due (unless the estate tax cap is changed). Obviously if the step up in basis is eliminated by the current administration, children would then get hit with both a property tax reassessment and the very high capital gains, but this is an unknown at this point. Either way, the unfortunate outcome is that the State of California will get its money if you own property in this state.
Disclaimer: Ashley is a real estate attorney and not a tax attorney or CPA, so this blog is not intended to construe any tax advice or legal advice, and is specific to the laws of the State of California. If you have questions about this article, please contact attorney Ashley M. Peterson at 619.222.7300.