With the passage of Proposition 19, changes made concerning property tax assessments may impact your estate planning.  These aspects of Proposition 19 take effect on February 16, 2021.

What does this mean for you?

You now have only until February 16, 2021 to take advantage of the full benefit of the parent-to-child transfer exclusion. If you own multiple properties today, you may want to consider transferring some of them to your children prior to February 16, 2021. There are other gift and estate tax and capital gains tax issues that arise with such gifting, so you’ll want to consult with an attorney before doing so.

Proposition 19 will certainly change some of the current strategies and may create new opportunities for us to assist our clients. Please contact The Green Law Group’s Estate Planning office if you have any questions or concerns regarding your specific estate plan.

Current California Law (Pre-Prop 19)

California property tax is assessed based on the property’s purchase price and the cost of any improvements to the property. Unless a “change of ownership” occurs, the assessed value of real property increases by no more than 2% annually. Because average appreciation of California real property has far exceeded the 2% annual adjustment since the enactment of Proposition 13 in 1978, long time owners of California real estate generally enjoy a very low property tax burden relative to owners of newly acquired property.

California currently provides two valuable exemptions from reassessment, which allow the continuation of this benefit after transfers of qualifying property interests between parents and children.  First, a transfer of a parent’s principal residence to a child is completely exempted from reassessment, regardless of the assessed value.  The child (or children) succeed to the parent’s assessed value regardless of the value of the property or its assessed value at the time of transfer. Second, transfers of real property interests which are not the parent’s primary residence (residential or commercial) are exempted from reassessment to the extent of $1 million of assessed value, per transferor, regardless of the fair market value of the property.

Changes to the Parent-Child Exclusion Under Prop 19 (Effective February 2021)

Proposition 19 limits the availability of the parent-child exclusion for purposes of real estate tax assessments.  Proposition 19 changes this by, first, requiring that the child or children use the residence as their own principal residence or it will be reassessed and second, capping the exclusion to $1,000,000.00.  Proposition 19 will prevent the ability of a parent to transfer their personal residence to the children and thereafter rent it back, and if siblings are entitled to the residence at the end of the fixed term, they would need to move in together and share a household to qualify for the exemption – not ideal for most adult children.

This could lead to a massive property tax increase, though it may be possible to mitigate this. Those with an established trust that holds a residence and names their children as remainder beneficiaries, or those planning a transfer of a home to their children outright or in trust, should contact their tax and wealth planning attorney at The Green Law Group before the effective date of this new law. It is critical that we review your estate planning documents and recommend any necessary changes.

Example 1 – Transfer of Two Properties to Child (neither as Child’s Personal Residence)

Facts:

• Property A is Parent’s principal residence: $5M FMV, $500,000 assessed value
• Property B is Parent’s secondary residence: $5M FMV, $1M assessed value
• Parent’s total assessed values for property tax purposes is $1.5M
• Property tax rate is 1.25% (estimated)
• Parent’s estimated total property taxes are $18,750
• Parent transfer Property A and B to Child and claims the parent-child exclusion

Child’s Assessed Values and Property Tax Consequences:

Example 2 – Transfer of Two Properties to Child (Property Used as Personal Residence)

Facts:

• Same facts as above, except Child maintains Property A as their principal residence after the transfer.

Child’s Assessed Values and Property Tax Consequences:

Mike M. Khalilpour
(805) 306-1100 ext. 117
mike@thegreenlawgroup.com