Proposition 19 Brings Significant Changes to Property Tax Rules for Inter-County and Inheritance Transfers
In November 2020, California voters passed Proposition 19, which modifies Article XIIIA (aka Proposition 13) of the California Constitution and significantly affects certain types of real property transfers.
Proposition 13 limits annual increases in assessed values to a maximum 2% except when there is new construction and/or a transfer of ownership. Over the years, California voters passed several propositions excluding certain transfers of ownership from reassessment under Proposition 13:
- Propositions 58 and 193: Excludes transfers between parent and child (58) or grandparent and grandchild (193) from reassessment.
- Propositions 60: Homeowners 55+ years of age can sell their primary residence and transfer the base year value of that property to a replacement residence if certain conditions are met. Proposition 60 applies to intra-county transfers.
- Proposition 110: Severely disabled persons can transfer the base year value of their primary residence to a replacement residence if certain conditions are met.
Proposition 19 Expands Certain Transfer Benefits
Homeowners who are 55 or older, or who are severely disabled, or who are victims of a Governor declared disaster, wishing to transfer their property tax benefits, to another home in California will have more options:
- A homeowner can purchase a higher value property. The transfer no longer will have to be a property of equal or lesser value. The prior benefit can be transferred and an upward adjustment is added for the difference.
- An inter-county transfer can occur between any two counties, not just counties with local ordinances.
- A qualifying transfer can be made up to 3 times, not just once and for Governor declared disaster victims, there is no limit on the number of times the benefit can be used.
Proposition 19 Eliminates and Reduces Certain Inheritance Benefits
Children/grandchildren who inherit their parents’/grandparents’ principal residence but choose not to make the home their principal residence will now have the property re-assessed. Heirs must now file and qualify to receive the Homeowner’s Exemption or Disabled Veterans’ Exemption within one year of transfer of ownership. However, family farm transfers are allowable for this exclusion without the principal residence requirement. Further, parents/grandparents can no longer transfer up to $1,000,000 of other property, such as residential rental property or commercial property, in addition to their principal residence. This reset of the assessed value to fair market value can significantly increase the assessed values as the value differences from base year 1975 properties to current value can be significant.
For example, a family property currently assessed for $50,000 with an annual property tax of approximately $600 could now be re-assessed to current market value at $750,000 resulting in an annual property tax of approximately $9,000. This significant property tax increase could affect the feasibility of ownership of inherited family properties.
This may also impact common estate planning trusts like qualified personal residence trusts which allows the transfer of a residence to a trust while that residence can still be occupied for a fixed number of years. The parent continues to live in the residence as their primary residence, and at the end of the fixed number of years, the residence transfers to their child. Under existing law, when the child becomes the owner, they would qualify for the parent-child exclusion but under Proposition 19 the child would have to make the residence their primary residence or the property would be reassessed. Those with a trust that holds a residence in the name of their child as a remainder beneficiary or those in the process of estate planning should contact a tax and estate planning professional to discuss potential impacts.
Timing
Proposition 19 applies to Parent-Child/Grandparent-Grandchild transfers completed after February 15, 2021* and base value transfers involving people over 55 or severely disabled or disaster victims completed after March 31, 2021.