In the November 2020 election, the voters of California passed Proposition 19 by a slim margin. Although Prop 19 does some beneficial things for people over the age of 55 and people who have lost their homes in a disaster, it also eliminates most all of the favorable property tax treatment that previously existed on transfers of real estate between parents and their children (and in some cases where the middle generation is deceased, between grandparents and grandchildren).
Under existing law (which remains in effect only through February 15, 2021), the transfer of a primary residence from parents to children (including transfers through lifetime gifts or inheritance) won't trigger a reassessment for property tax purposes regardless of value. As a result, children can continue to pay property taxes at the same rate their parents paid when they receive the primary residence via gift or inheritance. In addition, under the existing law, parents can also transfer other properties to their children without triggering reassessment, provided that the assessed value of the other property does not exceed $1 million in value. The “assessed value” is the value that is on the assessor’s tax rolls, and is oftentimes significantly lower than the actual fair market value of the property; this is especially true with properties that have been owned for a long time.
Following the passage of Prop 19, as of February 16, 2021, the only property that can potentially avoid property tax reassessment on a transfer between parents and children is the personal residence (or family farm). However, there are significant limitations on the ability to prevent reassessment even on the transfer of the personal residence from a parent to a child. First, the child must occupy the residence as their primary residence after the transfer. Second, there is a cap to the value of residence that can avoid reassessment; it is no longer an unlimited value. Instead, the value has been reduced to $1 million (which is calculated differently: it’s the difference between the fair market value and the assessed value). Notably, ALL other transfers between parents and children, including investment/commercial properties, rentals and second homes, will be fully reassessed when transferred between parents and children (this includes lifetime gifts and inheritances). Property taxes on those properties will be computed based on the fair market value of the property at the time of the transfer.
As a result of the changes, most sales and transfers will cause the property taxes to be reassessed. For properties that people have owned for a long time, that can be a substantial financial burden to the transferees.
Frequently Asked Questions
What property will I be able to transfer to my children (or grandchildren) free of reassessment after Prop 19 goes into effect?
A family home or farm that is the principal residence of both the transferor and transferee, of limited value. Prop 19 eliminates the exclusion for any other type of property, including rentals, commercial properties or family vacation homes.
What's a family home?
The “family home” must be the principal residence of the transferor and then become the principal residence of the transferee. In order to avoid a property tax reassessment, the transferee must claim the homeowner’s exemption at the time of the transfer, or within one year of the date of transfer.
What's a family farm?
A family farm is defined as “any real property which is under cultivation or which is being used for pasture or grazing, or that is used to produce any agricultural commodity, as that term is defined in Section 51201 of the Government Code,” which in turn is “any and all plant and animal products produced in this state for commercial purposes…”
How does the transfer between grandparents and grandchildren work?
Subject to the same limitations that exist on parent/child transfers, grandparents can transfer to grandchildren without property tax reassessment (both before and after Prop 19) only so long as all of the parents of those grandchildren, who qualify as children of the transferors, are deceased as of the date of the purchase or transfer.
How is the $1 million exemption on the principal residence calculated after Prop 19 goes into effect?
FMV = Fair Market Value; AV = Assessed Value (found on your property tax bill) • If FMV – AV is less than or equal to $1M, then reassessment avoided • If FMV – AV is greater than $1M, then there will be a partial reassessment as follows: • AV + FMV – AV - $1M
Example: AV of $500K, FMV of $2M • $2M - $500K = $1.5M (greater than $1M) • $500K + $2M - $500K - $1M = $1M • New assessed value of $1M
How do I avoid the negative property tax reassessment issues Prop 19 brings?
You can sell or transfer the properties that would no longer qualify for the exclusion to your children (or potentially grandchildren) now, before the February 16, 2021, deadline. If you do so, your transfers will be classified under the old law. However, transferring properties now will mean that your children will receive a “carry over basis” and will not receive a “step-up in basis” when you die. This could result in higher capital gains taxes if a child then sells the property after the transfer. Also, if you give property to your children now, you will be required to file a federal gift tax return.
When's the deadline?
The transfer has to take place and the deeds recorded before Feb. 16, 2021.
Should I transfer the properties now?
It depends. There are many factors to consider and discuss before deciding to transfer properties to your children. There is no “one size fits all” answer. Every person’s situation is unique. Other considerations beyond just the property tax reassessment include: capital gains tax issues, gift tax issues, appraisals, whether or not your children are going to retain the properties, filing of gift tax returns, how the real properties are currently held, creditor issues, whether you're willing to give up control of the properties, and if the properties are income producing, whether you can give up the income, as well as many other issues that can and do arise. Transferring a property to a child will also subject the property to the child’s own creditors and potential claims from their spouses in the event of a divorce.
Can I put the property in an irrevocable trust and avoid all the negative effects of Prop 19?
People understandably want to transfer property to their children now to avoid reassessment for property tax purposes, but keep the lifetime right to the income for themselves, and ensure that the children will still receive a step-up in basis upon their death. There is a lot of buzz surrounding how to avoid all of the negative effects of Prop 19 by utilizing an irrevocable trust. It is the opinion of this firm that no such results can be guaranteed through the use of an irrevocable trust. It is anticipated that the State Board of Equalization will eventually issue advisory opinions on the use of particular trusts as they pertain to the new law, but such has not yet occurred.
If you're concerned about Prop 19, please contact our office and set up a phone call with one of the attorneys to discuss the possible transfer. Please be aware we are very busy dealing with this, so there may be some delay in getting to you.