Law Bulletin | January 8, 2021
PROPOSITION 19: HOW IT MAY IMPACT YOU
As you may be aware, Proposition 19 passed by a slim margin in November’s election and has, at least in part, significant ramifications for use of the parent-child exclusion from property tax reassessment on transfers of real estate between parents and children. This component of the new law takes effect on February 16, 2021.
California property tax laws require a reassessment of the value of property for tax purposes whenever real property changes ownership. The property value for purposes of determining the property tax due becomes the fair market value of the real property transferred unless an exception applies. Before Prop 19 becomes effective, a parent may transfer his or her principal residence to a child by gift, sale, or as a result of death, and the property’s assessed value — and property taxes due — will remain unchanged. Additionally, before Prop 19 becomes effective, a parent may exclude from reassessment transfers to a child or children of real property other than a principal residence, such as a vacation home, family farm, or commercial property. This exclusion is limited to $1 million of the assessed value of the transferred real property. Similar though more limited exceptions apply to grandparent to grandchild transfers.
Prop 19, effective February 16, 2021, changes this by:
- Requiring that the child or children occupy the parent’s principal residence as their own principal residence. If they do not, the property will be reassessed to its fair market value upon transfer. Furthermore, even if the child occupies the residence as his or her primary residence, the exclusion from reassessment is limited, the calculation of which depends on the property’s current fair market value and the property’s assessed value. Other limitations apply as well.
- Providing that certain family farms may also claim a limited exclusion from reassessment similar to the exclusion applicable to transfers of a principal residence.
- Requiring that all real property other than a principal residence, such as vacation homes, rentals, commercial property, and the like, be reassessed to current fair market value upon transfer from parent to child. There are no exceptions.
By way of examples*:
Transfer | Old Law | New Law |
Mom transfers $2 million principal residence to son at death. Son lives out of the area and wants to rent out the house. The assessed value of the principal residence is $500,000 and Mom’s property taxes are $5,000/year. | Exempt from reassessment. Son pays $5,000/year in property taxes. | Property is reassessed at Fair Market Value (FMV). Son pays $20,000/year in property taxes. |
Mom transfers $2 million principal residence to son at death. Son moves in and claims the home as his principal residence. The assessed value of the principal residence is $500,000 and Mom’s property taxes are $5,000/year. | Exempt from reassessment. Son pays $5,000/year in property taxes. | Property is partially reassessed. Son pays $10,000/year in property taxes. Under Prop 19 formula, new tax base is $1,000,000. |
Mom transfers $1.4 million principal residence to son at death. Son lives out of the area and wants to rent out the house. The assessed value of the principal residence is $500,000 and Mom’s property taxes are $5,000/year. | Exempt from reassessment. Son pays $5,000/year in property taxes. | Property is reassessed at FMV. Son pays $14,000/year in property taxes. |
Mom transfers $1.4 million principal residence to son at death. Son moves in and claims the home as his principal residence. The assessed value of the principal residence is $500,000 and Mom’s property taxes are $5,000/year. | Exempt from reassessment. Son pays $5,000/year in property taxes. | Exempt from reassessment. Son pays $5,000/year in property taxes. |
Mom transfers $3 million commercial property to son at death. The assessed value of the property is $900,000 and Mom’s property taxes are $9,000/year. | Exempt from reassessment. Son pays $9,000/year in property taxes. | Property is reassessed at FMV. Son pays $30,000/year in property taxes. |
*These examples are for illustration purposes only. Other factors not included here are additional assessments (bonds, parcel tax measures), and routine annual assessed value increases.
As a result of this law change, many clients are reaching out to discuss strategies to utilize the parent-child exclusion from reassessment now, prior to the February 16, 2021 change in the law. If you wish to explore your options, please contact your attorney as soon as possible to allow adequate time to complete any transactions ahead of the February 16, 2021 deadline.
From the Estate Planning Team:
Barbara Gallagher, Albert Handelman, Katherine Jeffrey, Kevin McCullough, Mark Miller, Candice L. Raposo, and Carmen Sinigiani.
Spaulding McCullough & Tansil LLP