In November California voters narrowly passed Proposition 19 which amends the state constitution by changing some rules on the reassessment of real property and allocating any additional revenue that results from the new guidelines to wildfire agencies and counties. This targeting of expected revenue resulted in the mouthful title of Prop 19 as the “Property Tax Transfers, Exemptions, and Revenue for Wildfire Agencies and Counties Amendment”. We will just call it Prop 19!
Since many families have significant equity in their real estate holdings, RINA urges its clients to analyze how Prop. 19 may affect them.
The workings of Prop 13 that passed in 1978 are familiar to most Californians. Under Prop 13 the increase in assessed value of real estate for tax purposes is limited to 2% per year. Property is reassessed to fair market value when the property is transferred.
An exception to the reassessment on transfer was introduced in 1986. Legislation was passed excluding from reassessment transfers between parents and children of the principal residence and $1 million assessed value of other property. Some grandparent to grandchildren transfers may be excluded also.
Proposition 19 has changed the rules for transfers to children and grandchildren significantly. The old rules (above) are in effect until February 16, 2021. After that date the Prop 19 terms will apply, and property owners need to consider:
- The old rule allowed the transfer of the principal residence with no dollar limitation on the value of the residence. The new rule will allow the transfer of the principal residence, but the child or grandchild must use the property as their principal residence within one year of the transfer. The old rule allowed the child or grandchild to use the property as a second home or a rental property.
Significantly for the Bay Area, the exclusion from reassessment is limited to the first $1 million of fair market value.
- The old rule allowed each parent to transfer other real estate with an assessed value (i.e. Proposition 13 assessed value) with an aggregate value of up to $1 million to a child or grandchild without reassessment. The new rule eliminates this exclusion so commercial and other non-residential property cannot escape reassessment to market value.
The two points above hit especially recipients who were planning on renting transferred property.
Real estate taxes can increase significantly as a result of a reassessment, and therefore careful planning is necessary when considering a transfer. A transfer to a child or eligible grandchild by gift by February 15, 2021 can preserve many years of lower real estate tax if the property will be retained by the recipient.
On the other hand, the cost basis of the property in the hands of the donor will transfer to the donee when received by gift. If the property is sold in the future, the taxable gain on sale is likely to be higher when compared to real estate received by inheritance. Under current law, inherited property receives a step up in basis to the value of the property on the date of inheritance). This rule effectively eliminates the capital gain on appreciated real estate to the recipient.
Some homeowner benefits from Proposition 19:
- Effective April 1, 2021 homeowners 55 year of age, severely disabled or victims of wildfire or natural disaster may carry-over the tax base of their home to any county in California. This greatly expands the carry-over options for homeowners.
- The carry-over is no longer limited to a replacement personal residence of equal or lesser value. However, if an owner buys a more expensive residence, the difference in market value between the old and new homes will be added to the old home’s assessed basis.
- The ability to make this transfer is increased from one to three times in a lifetime for all categories.
- There is a two-year replacement period for replacement property that is purchased and constructed.
Proposition 19 made significant and complex changes to rules on property assessment in some situations. Please contact your RINA accountant for assistance with the analysis of your specific situation.