Proposition 19 – What Happens Now?
Proposition 19 passed during the 2020 election by a slim 2.2% margin. This Proposition, which changes parts of Proposition 13 and Proposition 58, affects the way we currently pass appreciated property down to our heirs and presents a planning opportunity for many Californians.
Real estate in California is taxed based on assessed value rather than fair market value. In general, the assessed value is the purchase price of the property plus improvements. After the assessed value is calculated, it increases annually at a rate no more than 2% per year unless there is a change in ownership. Historically housing prices in California have increased at a rate greater than 2% per year, creating a gap between the fair market value of the property and the assessed value of the property.
Proposition 58 allowed transfers from parents to children to be virtually exempt from reassessment at the time of transfer. Proposition 19 changes this so that transfers between a parent and a child are only exempt from reassessment if:
- The child uses the property as their primary residence AND
- The fair market value at the time of transfer does not exceed the assessed value by more than $1 million.
If the fair market value of property does exceed the assessed value by more than $1 million, the reassessed value becomes the fair market value less $1 million.
For example, let’s say a child inherited their parents’ primary home. The home has an assessed value of $250,000 and a fair market value of $1 million. If this child decides to live in the home as their primary residence, they will keep their parents favorable assessed value at $250,000 since the fair market value does not exceed the assessed value by more than $1 million.
If we keep the same facts but change the fair market value of the home to $2 million, then the property’s new reassessed value will be $1 million. That is the fair market value of $2 million less $1 million.
If we use the $2 million fair market value, but the child decides not to live in the home as their primary residence, the home gets reassessed to the full fair market value of $2 million.
Using a standard property tax rate of 1.25%, the yearly property tax cost for a home with an assessed value of $250,000 is $3,125. The yearly property tax cost for a home with an assessed value of $2 million is $25,000.
This change goes into effect on February 16, 2021.
What do we recommend? Estate attorneys, estate attorneys, estate attorneys…and more estate attorneys. It is critical that planning be done before the February 16, 2021 effective date in order to take advantage of any planning opportunities you may have access to.
The second change from Proposition 19 affects seniors who are planning to down-size. The new law allows people who are aged 55 and older, as well as people who are permanently disabled or victims of a wildfire or natural disaster, to transfer the assessed value of their California primary residence to a newly purchased or newly constructed replacement primary residence.
Proposition 13 had a few restrictions that Proposition 19 does not. First, individuals were restricted to certain counties when transferring their tax basis. Second, individuals were only allowed to purchase a replacement home that was either equivalent to or lesser than the fair market value of their current home.
Proposition 19 allows individuals who qualify for the transfer to move to any county within California. In addition, individuals can now purchase a replacement home with a fair market value that is greater than their original home. However, in this case, the transfer value becomes the assessed value of the original home plus the difference between the new property’s fair market value and the old property’s fair market value.
For example, if a senior couple sold their home with an assessed value of $250,000 for $2 million and bought a new home for $3 million, the new home’s assessed value would be $1.25 million, which is the $250,000 assessed value, plus the $1 million increase in fair market value.
Qualifying individuals have 2 years from the date of sale to transfer their original assessed value to the new primary residence. In addition, they will have the ability to utilize this transfer up to 3 times in his or her lifetime.
This portion of Proposition 19 goes into effect on April 1, 2021.
In closing, your estate attorney is your best friend in negotiating the changing property tax landscape. If you do not have someone you work with, we are happy to make a recommendation. However, it is advisable for you to get in contact with the estate planning attorney that assisted you in setting up your trust to begin with.
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