How Does Proposition 19 Affect My Heirs?

Proposition 19 is a voter initiative approved in November 2020 that contains certain benefits to homeowners that are over age 55, severely disabled, or victims of disaster moving to another residence. It also however brings significant changes to transfers between parents and children, and between grandparents and grandchildren, by sale, gift or inheritance.

When California property is sold or transferred, it is reassessed at the current market value for purposes of calculating property taxes. Proposition 58 (effective 1986) allows parents to transfer their primary residence and up to $1 million dollars (per parent) in change in reassessed value of other properties to children without reassessment. Children simply maintain their parent’s Assessed Value (as shown on the Assessor’s Tax Bill) for property tax purposes. Similarly, Proposition 193 (effective 1996) allows grandparents to pass property to grandchildren under a similar set of rules when the parents of the grandchildren are deceased. The goal of these two sets of legislation is to prevent families from losing family owned property because of a sudden increase in property taxes. Proposition 19, which takes effect February 16, 2021, changes Propositions 58 and 193.

Under Proposition 19, only property which is the parent’s principal residence and which will be used by the child as their principal residence within one year of the transfer will qualify for a partial or complete exclusion from reassessment; and no other property transfers will qualify. The $1 million dollar in change in reassessed value of other properties is completely eliminated.

Layered over this is a $1 million dollar exclusion on the parent’s principal residence which will determine if the principal residence is partially reassessed; or not reassessed at all. If at the time of transfer the Fair Market Value of the principal residence is less than the Assessed Value plus $1 million dollars, the then the property is not reassessed. Conversely, if the Fair Market Value of the principal residence is greater than the Assessed Value plus $1 million dollars, then the property is partially reassessed to the extent the Fair Market Value exceeds the Assessed Value plus $1 million dollars.

As of the date of this article, there exist many questions which remain unanswered and both the California Assessor’s Association and the California State Board of Equalization are working to clarify and interpret issues raised with Proposition 19. Some of the questions which remain unclear are as follows.

1.         How long must a child reside in the principal residence to effectively transfer their parent’s Assessed Value?

2.         When multiple children inherit a parent’s principal residence, do all of the children have to claim the property as their principal residence?

3.         How are mixed use properties, such as a property where a ground floor is zoned commercial and the upper floor residential which also serves as the principal residence, and multi-unit buildings where one unit serves as a principal residence affected by Proposition 19; and will a partial reassessment apply?

Many of our clients have expressed concern over this new legislation, how it will affect their family and have questioned whether it makes sense for them to make changes to their existing estate plan. The simple answer is, it depends. Many considerations are applied to any given set of circumstances, including and not limited to cost basis for capital gains purposes, the Federal gift tax, estate tax, mortgage considerations and property rights.

For more information, please visit us at www.KirkSimas.com, or call us at (805) 934-4600 to schedule an appointment.