Will your children keep your CA residence after your passing and are you willing to give them your house before 2/15/21? Are you thinking of moving within CA and approaching age 55 or over? If so, this article on Proposition 19 particularly pertains to you.
In November 2020, Proposition 19 “The Property Tax Transfers, Exemptions, and Revenue for Wildfire Agencies and Counties Amendment,” passed with 51% of California voter approval. As a result, there is a short window of time between now and February 15, 2021 to utilize the benefits of Prop 58 before they go away.
Summary of the changes:
- A limitation of the parent-child (and grandparent-grandchild) exclusion from property tax reassessment for properties that will be used as the recipient’s personal residence.
- A more generous rule that allows homeowners who are either over 55, have severe disabilities, or are victims of natural disasters or hazardous waste contamination to purchase a new residence but retain their property tax assessment from a prior home.
- Additional revenue for fire protection, and to reimburse counties who have losses in property tax revenue.
While there are multiple aspects of prop 19 (outlined above), we are going to focus here on the more time-sensitive component of the amended rules, regarding the property tax assessment changes that come into effect February 16, 2021.
Effective February 16, 2021, most parts of the parent-child exclusion (Prop 58) will be eliminated; an exclusion that allows parents to transfer specific property to their children without reassessment. Under the old law, parents could pass their primary residence to their children with no property tax consequences. The children would inherit the parent’s Prop 13 tax basis regardless of the fair market value (FMV) or the assessed value. After such a transfer, the children could rent the property out, live in it full time, use it as a second home, or even allow their parents to continue living in the property.
However under the new rule, children must consider the property as their primary residence after the transfer to qualify for the exclusion. Prop 19 also allows the assessor to increase the assessed value of the property upon transfer if the FMV exceeds $1,000,000. Therefore gifts, sales, or inheritances now are potentially more valuable than transfers after February 15, 2021.
Another significant change is the $1,000,000 exclusion for each parent. In addition to transferring a primary residence, each parent has historically been able to transfer up to $1,000,000 in assessed value to their children. Property types could be single family residences, multi-family, industrial, commercial and even agricultural. This is particularly important for tax payers who have owned property for a number of years and have a low assessment relative to the FMV.
For example, if a parent owns an apartment building with an $800,000 assessment, they should expect to pay approximately $9,000 in property taxes. Let’s assume the property now has a FMV of $5,000,000. Under the old rules (and through February 15th), parents could transfer the real estate to their children and completely shield any adjustment to the assessment by using the $1,000,000 exclusion. However, due to prop 19, if the parent dies or transfers the property to children after February 15th the annual taxes will go up to about ~$55,000 a year.
The good news is there are strategies to mitigate these changes. Depending on a number of considerations, individuals may desire to complete an outright intervivos gift (gift during life), a new irrevocable property trust, a new grantor trust, an LLC, or an installment sale to a child prior to February 16, 2021 to take advantage of the benefits of the prior law, and the current high estate and gift tax exclusion. However, be aware, with a gift there is the loss of the step-up in basis if a property is gifted (rather than bequeathed at death). Additionally once the property is transferred outright, it is out of your control. While a decision of this nature must be made promptly given the timeline, carefully considering the pros and cons associated with each type of transfer, and discussion with your accountant would be prudent.
Additional logistics to consider (if you are looking to take action) is that you will want to be sure your deed and related supporting documents are prepared and signed by no later than February 15, 2021. Remember also that due to Covid-19, certain logistics such as standing in line at the Recorder’s Office to have deeds recorded the same day are not realistic. The notarizing process can also sometimes cause unintended disruptions in handling all of the processing necessary for such a situation. Please allow time for unexpected glitches that might occur.
We hope this information will help you begin to determine whether these changes apply to your specific situation, and what different resources may be needed to help you achieve your goals.
How Mission Wealth Can Help
At Mission Wealth we can help you analyze your real estate portfolio, including the income yield and rate of return you are receiving. If you plan to purchase a new home, we can help evaluate your real estate holdings and act as a sounding board to help you make smart decisions. We’ll also review your insurance coverage to make sure you’re properly covered. We can coordinate with your existing real estate professionals or introduce you to others.
We can also help you determine alternatives and tax consequences related to those alternatives, if applicable. In addition, we can help you categorize your spending and make real estate recommendations in order to ensure your spending is aligned with your goals. This will also help you understand how much you can safely spend without jeopardizing your long-term financial security.