Everyone’s eyes were on top of the list on November 3. But other elections also had a huge impact on people’s lives. In California, voters had several proposals, including Proposition 19. As of November 9, 2020, Proposition 19 was going to pass by a margin of 51.2% to 48.8% with 84% of the vote counted.
Proposition 19 is a California ballot to amend Propositions 13 and 58. Proposition 13 passed in 1978. Proposition 13 increases the limited property tax to 2% annually unless it is reassessed due to a sale or other transfer. As a result, many properties in California have a tax valuation well below the current fair market value. Proposition 58, which passed in 1986, allowed a property owner to pass along their primary residence (and up to $1 million in assessed valuation of other property) to their children on a preferential tax assessment of the property. (This was expanded by the subsequent proposal for eligible descendants.) California law also allowed a qualified homeowner (over age 55, severely disabled, or victim of a natural disaster) to move once to a participating county in the state and submit their estimated rating. With them if they are moving into a less valuable home.
Proposition 19 amends existing law justified in Propositions 13 and 58. First, it allows eligible owners (over age 55, severely disabled, or victim of a natural disaster) to move anywhere in the state up to three times to a home of less value and bring Assess the property tax with them. While this is great for homeowners, Proposition 19 also amends the law regarding inherited property.
Prior to the effective date of Offer 19, the property owner can leave their primary residence and up to $1 million of the appraised value of other properties for their children (and eligible grandchildren) and the appraised value will be transferred with the property. Following Proposition 19, the estimated preferential value can only be transferred if 1) it is for primary residence (and no other estate), 2) only if the child (or eligible grandchild) will use it as his or her primary residence, and 3) only to the extent that it does not exceed Fair market value estimated value of more than one million dollars. Therefore, after Proposition 19, another transfer of ownership, such as rental property or commercial property, will face a reassessment of fair market value at the time of the transfer.
Let’s look at an example:
Mary owns her primary residence, and is currently worth $1 million, with an estimated value of $300,000. She pays $3,600 annually in property taxes on her primary residence. If the property is revalued at fair market value, the property taxes will be $12,000 per year. Mary also owns a rental property that is worth $250,000 and is worth $1.2 million. Mary pays $3,000 annually in rental property taxes, but if assessed at fair market value, the property taxes would be $14,400. Mary has one child, Jason, to whom she will leave her property.
Prior to the implementation of Proposition 19, Mary could leave these two properties to Jason and would continue to pay the same property taxes that Mary would have. Property taxes will only increase by up to 2% per year, just as with Mary. After applying Proposition 19, if Mary transferred the rental property to Jason, it would be revalued at fair market value and Jason’s property taxes would range from $3,000 that Mary would have paid to $14,400. Similarly, if Mary moved her primary residence to Jason, it would be revalued at fair market value and property taxes would increase from $3,600 to $12,000 per year, unless Jason used it as his family home.
What can be done about it? Suggestion 19 is effective for transfers After February 15, 2021. Therefore, Mary could transfer the property to Jason before that date and the old law would still apply. In other words, Jason will not face a revaluation of the property to its fair market value and will not have to live in the condo as his family’s home.
Mary can pass this property over to Jason right away. However, direct transfer may leave the property at risk in the event of Jason’s divorce or other problems. Transferring to Jason in a trust can avoid many of these issues. However, any such transfer must be made by February 15, 2021. Any transfers after this date, whether express or in trust, will be subject to Show Rules 19. Of course, when Jason subsequently transfers such property again (after February 15), 2021) due to his death or other causes, Proposition 19 will remain in effect and the properties will be revalued at the then fair market value unless the family home exception in Proposition 19 is applied.
Will Proposition 19 have unwanted consequences for your family? Consider whether transferring ownership of real estate in California by February 15, 2021 makes sense for you.
Stephen C. Hartnett, JD, LLM
American Academy of Estate Planning Lawyers, Inc.
9444 Balboa Street, Suite 300
San Diego, CA 92123
Phone: (858) 453-2128