Two Propositions were on the ballot in California this election that affected state property tax rules. Proposition 15 did not pass. It would have impacted commercial and industrial property owners. Proposition 19, on the other hand, did pass. It will affect real property owners, especially those with legacy properties.
When the new rule goes into effect on February 15, 2021, residential property transfers will be subject to different regulations. Up until now, California property tax is assessed based on the property’s original purchase price and the cost of any improvements to the property. Then, the taxable value of the property increases by no more than 2% annually as long as the ownership remains the same. If the property is sold, then the new owner’s property taxes would be based on their purchase price. Those who have owned their properties for a long time have benefitted from relatively low tax increases year over year on top of the lower purchase price the property value was originally based upon.
Under the old rule, legacy properties (including some investment properties)could be handed down from one family member to another while retaining the existing property tax schedule. Someone inheriting a house that has been in the family for many years or decades will benefit from the assessed taxable value that is much lower than the real current market value.
Proposition 19 changes this law. It limits the types of transfer of real property from parents to children without reassessment, as well as the overall property tax benefit available. The only transfer that will qualify now is when a parent transfers their principal residence to a child, who then uses the property as their principal residence.
If the transfer meets the principal residence requirements as outlined in the new rule, the child’s assessed property value is affected depending on how much more the property is worth now compared to the parent’s assessed value. If the value of the property (at the time of transfer) exceeds the parent’s assessed value by less than $1 million, then the child inherits the parent’s existing assessed value schedule. If the property current assessed value is more than $1 million of the parent’s assessed value, then the child’s new assessed value is the current market value of the property less $1 million.
There are a couple of exemptions to Proposition 19:
Primary Residence Transactions Under Special Circumstances—Home buyers over the age of 55, those who are severely disabled or those affected by natural disasters such as wildfires will see significant tax benefits as a result of Prop 19. The assessed value of their previous principal residence can be transferred to a replacement residence located in any California county
Specific Intra-Family Transfers—As noted earlier, qualifying primary residence transfers with an assessed value difference of less than $1 million will allow the child to inherit the parent’s assessed value and continue with more tax savings than if they had purchased the property.
Check out this great article that walks through a few different real-world scenarios and shows the impacts of Proposition 19 in different property transfer situations.
With the rule not taking effect until February 21 of next year, many legacy property owners will be rushing to transfer any non-primary residences or investment properties to their beneficiaries. If this describes you, you may want to research your options and consider taking action before Proposition 19 impacts the transfer and future tax liabilities of any long-held properties within your family.
For help and guidance with successful transferring of properties as part of your overall financial plan, contact Illumination Wealth today.