Prop. 19 Passed, Here Is What You Need to Know
Proposition 19, which passed last month, has important consequences for all real property owners in California. It is important to act quickly before Proposition 19's effective date of February 16, 2021.
Proposition 19 has several provisions; this alert focuses on the changes to parent-child exclusion.
Generally speaking, under current law, property tax in California is assessed based on the value of the property when purchased or constructed. This assessed value increases annually, but the annual increases are capped. So, it is common for the assessed value (for property tax purposes) to be significantly lower than the fair market value of the property.
Current law also allows a tax break for parent-child transfers. When parents give or sell real property to their children (or, in limited circumstances, grandchildren), the recipient continues to pay property tax at the same assessed value as the parent. The tax break is limited to transfers with an aggregate assessed value of $1 million per person (a combined $2 million, if both parents exclusions are used). Under current law, the transferred property can be residential or commercial and the fair market value of the property is irrelevant. Any parent-child transfers over the $1 million in assessed value result in reassessment at the time of transfer.
Importantly, current law also allows, in addition to the $1 million exclusion, a parent to transfer his or her primary residence (regardless of assessed value) to children and the child retains the current assessed value.
Proposition 19 Changes
Proposition 19 eliminates the parent-child exclusion after February 16, 2021, with one important exception. Parents will still be able to transfer their primary residence to a child, and the child will keep the parent’s assessed value, but only if the child moves in and makes the property his or her own primary residence. This exception is limited further. The maximum benefit is limited to $1 million of fair market value. For example, if a residence is assessed at $1 million and the fair market value is $3 million, because of the limitation, the new assessed value would be $2 million. This means many Bay Area homes could be partially reassessed even if transferred to a child who makes the property a primary residence.
For parents that own multiple pieces of real property in California, it is important to note that giving a property (other than the parent’s primary residence) to a child after February 16, 2021, will cause immediate reassessment of the property for property tax purposes. This will increase the annual property taxes due on the property, in some cases dramatically.
Finally, QPRTs that have not yet terminated present unique challenges and possible solutions, if any, to address the impact of Prop. 19 will require special attention.
Actions to Take
After February 16, 2021, an important wealth preservation tool will be unavailable. Individuals with real estate in California should immediately consider their options. We urge all our clients to consider the following:
- If a person intends to gift California real estate to his or her children in the near future, it is likely that a gift before February 16, 2021 will offer significant property tax advantages over a later gift.
- If a person owns real property in California and wants to preserve the current assessed value for future generations, a transfer before February 16, 2021 may be the only method to achieve such a result (subject to future changes in law).
- If a person has rental properties in California and intends to transfer these to future generations, a transfer before February 16, 2021 may be the only way to avoid at least some reassessment of the property. We expect that planning involving transfers using legal entities may be subject to increased attention and scrutiny in the months and years to come.
- If a person has a QPRT that has not yet terminated, special care will need to be taken to address any potential property tax reassessment.
If you are interested in exploring whether Proposition 19 planning makes sense for you, please contact a member of the Private Client team.