“UNINTENDED CONSEQUENCES” OF PROPOSITION 19?

“UNINTENDED CONSEQUENCES” OF PROPOSITION 19?

California’s “Proposition 19," which was passed by a narrow (51% to 49%) margin on the November ballot, affected two unrelated exclusions from reassessment of real property in California.  Under Proposition 13, real property is reassessed for property tax purposes each time title is transferred to a new person.  Over the years various exemptions have been put in place to prevent certain transfers from triggering a reassessment, thereby preserving the lower Prop 13 appraised value for annual property tax purposes.  

Under former Propositions 60, 90 and 110, people over 55 could sell their principal residence and buy a new one in the same county (or a cooperating county) and roll their old lower tax base into the new property, as long as the newly purchased property was less valuable than the one they sold.  If the old home sold for one dollar less than the new home cost, then the senior could not roll their old assessed value into the new residence and the exemption was available only once during a person’s lifetime.

Proposition 19 expands that exemption to permit any person over 55, disabled or replacing a home lost in a fire, to sell their current residence and purchase or build a new residence anywhere in the State of California, and retain their old Prop 13 tax base in the newly acquired property, up to the sale value of their old residence.   If the new residence is more expensive than the old one, the difference in value will be added to the old tax base to come up with the assessed value of the new residence.  This kind of transaction can be done up to three times during the lifetime of the taxpayer.  This is the change that was most publicized in support of Proposition 19, as it favored the taxpayer. 

What was not publicized in promoting Proposition 19, and what may end up being the “unintended consequences” referenced above, was the adverse change it made in the exemption from reassessment on transfers between parents and children (or grandparents and grandchildren) that was previously dealt with under old Proposition 58 (and Prop 193 for grandchildren).  While the provisions for replacement homes by elders, disabled or displaced homeowners referenced above expanded the availability of the exemption for replacement dwellings, the provisions relating to transfers between parents and children have all but eliminated the “parent to child” and “grandparent to grandchild” exemption from reassessment under old Prop 58 and Prop 193.

Under old Proposition 58, a parent could transfer the parent’s principal residence of any value to a child and it would not be reassessed, even if the child used the property as a rental.  In addition, the parent could transfer to a child up to $1,000,000 in assessed value in any other real property in the state.  Proposition 193 extended that exemption to grandchildren if the grandparent’s child was deceased and the other parent of the grandchild was deceassed, not married to the child when the child died, or had remarried after the death of the child.

Proposition 19 now limits the parent to child exemption to transfers of a “principal residence” only, and then only if the child retains the property as their own principal residence.  If it is to be used as rental or vacation property it will be reassessed up to fair market value as of the date of transfer (i.e., the date of the gift for transfers during life or the date of death of the parent for transfers at death.)  All other property, whether residential or commercial, improved or unimproved, will be reassessed when transferred to a child if the transfer occurs after February 15, 2021.  

A further restriction on the reassessment exclusion is that the original assessed value will be retained only if the fair market value of the residence at date of transfer does not exceed the original assessed value by one million dollars.  If the property exceeds that amount, the new assessed value will be the original assessed value plus the amount buy which the fair market value of the property exceeds that value plus one million dollars.  

Finally, for transfers to grandchildren, the same residence rule and same dollar limits apply and a further requirement has been added that both of the grandchild’s parents must be deceased at the date of transfer, regardless of whether the grandchild’s parents were married at the time the parent who was the grandparent’s child died.  

While there are still some circumstances in which a family home is kept in the family as the family’s principal residence generation after generation, such situations are increasingly rare.  It is far more common for the child or grandchild who inherits a property to have their own home when the parent or grandparent dies and then keep the parent or grandparent’s home as a rental property.  While that can still be done, the property now be reassessed on the death of the parent and grandparent and the increased taxes will have to be paid year after year from the rental income.  The same is true for all other property transferred from parents to children after February 15, 2021 which is not used as a principal residence.  

As a warning to those inheriting properties after February 15, 2021, be advised that, if you do not immediately notify the County Assessor of the owner’s death, and the property remains in the name of the original owner (parent or grandparent,) the assessor will not know to reassess the property until title is formally transferred at some later date.  If the family holds onto a property for a period of time and does not report the owner’s death to the assessor immediately, the assessor will impose “escaped reassessment taxes” when the death is eventually reported and the reassessed taxes will be imposed retroactively to the date of death, with interest and penalties, resulting potentially in a very large tax bill.

Properties can still be transferred to children without reassessment if done prior to February 15, 2021.  However, doing so will prevent the child from claiming a “step up” in basis on the property at the parent’s death, which the child would have received if the property was eventually inherited, and could result in substantial capital gains tax on the eventual sale of the property.  In deciding whether to transfer now or later the property owner must balance out the costs and benefits of each option.  It is also possible that, when the reality of the negative impact Proposition 19 will have on transfers from parents to children dawns on a majority of the voters in California, another Proposition will appear on the ballot in the future to reverse out or modify Prop 19.  

Written by William Remery, Esq., a proud member of the Wellness Village.