December 7, 2020

California Proposition 19 Update

By Shauna Dell, Senior Manager, Tax & Business Services

California Proposition 19 Update Family Wealth Services

Proposition 19 is a state provision issued to benefit homeowners who are over 55, or disabled, or wildfire/disaster victims. The proposition also includes a provision that would increase the property tax burden on owners of inherited property. The increased property taxes will be paid by children and grandchildren who receive California real estate, primary residences and all other properties from their parents and grandparents as a result of inheritance. The new law goes into effect on February 16, 2021.

The current law, under Proposition 58, permits many transfers of properties between parents and children without triggering an increase in property taxes; this also applies to transfers of property from grandparents to grandchildren in limited circumstances. Proposition 58 permits a parent to transfer the assessed value of their primary residence to a child or children without any limitations on the fair market value of the residence, and each parent can transfer to a child or children real property such as rental property, commercial property, or vacation homes of up to $1,000,000 of assessed property tax value without triggering an increase in property taxes.

Under Proposition 19, the ability to transfer property to children without triggering a property tax reassement or increase is completely lost in all cases, other than a principal residence. Proposition 19 limits the exclusion from reassessment to transfers from a parent to a child of up to $1 million of fair market value, and the child has to use the property as his or her primary residence within one year of the transfer. The following chart from the California State Board of Equalization provides a comparison of the current and new laws.

PARENT-CHILD & GRANDPARENT-GRANDCHILD EXCLUSION

Current Law Proposition 19
Principal Residence
  • Principal residence of transferor
  • No value limit
  • Residence and home site (excess land may be excluded as “other property”)
  • Principal residence of transferor and transferee
  • Value limit of current taxable value plus $1,000,000 (as annually adjusted)
  • Family homes and farms
Other Real Property Transferor lifetime limit of $1,000,000 of factored base year value Eliminates exclusion for other real property other than the principal residence
Grandparent-Grandchild Middle Generation Limit Parent(s) of grandchild, who qualifies as child(ren) of grandparent, must be deceased on date of transfer No change: Parent(s) of grandchild, who qualifies as child(ren) of grandparent, must be deceased on date of transfer
Filing Period File claim within 3 years or before transfer to third party File for homeowners’ exemption within 1 year of transfer
Implementing Statute Revenue & Taxation Code section 63.1 (implements Propositions 58/193) To be determined
Important Dates Through February 15, 2021 Effective February 16, 2021

To mitigate the potential increase in property taxes related to Proposition 19, property could be sold to children, gifted outright or in trust or transferred to entities which would allow clients to take advantage of the current Proposition 58 Parent Child Exclusion before it expires. These Proposition 58 plans can be developed and implemented in late 2020 and early 2021, before the start of the scheduled Proposition 19 property tax increases. Also, major property tax savings may be available. Under Proposition 58, the $1,000,000 Parent-Child Exclusion from Reassessment is per parent which would allow a couple to transfer $2,000,000 of assessed property to their children.

For those considering gifting, the Federal Estate and Gift Tax Exemption is $11,580,000 for 2020 and $11,700,000 for 2021 per donor. This will allow many property owners to gift properties to their children without the imposition of federal gift tax. The Federal Estate and Gift Tax Exemption is currently set to expire on December 31, 2025, which may be reduced by an act of Congress signed by the President in as early as 2021. So, the best time for gift planning may be 2020. Also, note that gifting property needs to take into consideration income tax implications. Specifically, property transferred by gift takes a carry-over basis while property transferred at death, under current law, receives a fair market value step up in basis. If children acquire the carry-over basis property received from a lifetime gift, they lose the step up in basis at the death of the parent, subjecting them to both Federal and State capital gain taxes on sale of the property.

There is a relatively short period of time to implement planning under the current law, Proposition 58, before the new law goes into effect which could save a family a substantial amount in property taxes.

If you have any questions how the new law changes may affect you, please contact your Marcum Tax Advisor.

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