Last November, California voters passed one particular ballot initiative by a narrow 51.1% versus 48.9% margin. Known as Proposition 19, it was perhaps most recognized for increasing future flexibility for homeowners over age 55, disaster victims, and the disabled to sell a home and transfer their capped (Prop 13) property tax valuation to a new home when they move. Previously, this portability was limited in scope with tighter stipulations. This new law (beginning April 1, 2021) will certainly benefit a multitude of California seniors who want or need to move to a new home but would not be able to afford the increase in local property taxes from a fresh upward tax valuation when they purchase or build a new one at today’s home prices.
A less well-understood element of the new Proposition 19 however, is that beginning February 16, 2021, rules about parent-to-child transfers of that same property tax valuation will change, potentially a major inheritance issue.
- Only a primary residence will be eligible to retain the parent’s property basis, and even that will be limited to $1 million of home value. Currently all properties keep their existing property valuation, including vacation houses and rentals. This has allowed inheritors to retain houses in the family and boost net income on rental properties, but in the future, only the primary home will be eligible.
- The inheriting child will also be required to move into the home as his/her primary residence in order to keep the inherited property tax valuation intact.
- Transfers of ownership (such as a lifetime gift) taking place before the implementation date would lock in the parental property tax valuation but would surrender the future benefit of a cost basis “step-up” that accompanies inheriting after a death. That “step-up” to market value at inheritance can wipe out long accumulated capital gains and facilitate a tax-free sale if the child wasn’t planning to move into a parent’s home, but rather intends to sell it.
By now you might sense this is complicated and very specific to a family’s particular circumstances! It truly is. While legal mechanisms may exist making properties effectively exempt from the consequences of Proposition 19, they need to be done under the supervision and advice of a qualified and experienced attorney. This is a tax and estate planning issue rolled up into one, and limited time remains to accomplish transfers. Additionally, some areas will require clarification by agencies and the state legislature. Here is a link to a useful comparison chart of current law versus Prop 19 for your reference, provided by the California State Board of Equalization.
Whatever your situation, we advocate preserving as much future flexibility as you can manage, because the world is constantly changing, and so are the rules. We welcome the opportunity to further clarify and discuss with you. Happy New Year from all of us at Ashfield!