California Prop 19 and You
This election cycle, California voters approved Proposition 19, which will mark a major change in California’s property tax system. Another initiative that would also have changed the way that commercial and industrial properties were assessed, Proposition 15, was defeated by California voters.
This post focuses on the changes Proposition 19 will make to transfers of real property between parents and children: so-called “parent-child transfers.” Proposition 19 also affects transfers of assessment basis between properties for seniors, fire and natural disaster victims, and the disabled, and alters the way that tax revenues are allocated. However, those changes are not discussed here.
In the current pre-Proposition 19 property tax assessment scheme, parents can transfer real property to a child or grandchild (if the grandchild’s parent, the transferor’s child, is deceased) without subjecting the property to reassessment for property tax purposes. This works for the transferor’s primary residence regardless of value, and for other real property up to the first one million in value. In doing so, parents have been able to pass a significant benefit in the form of tax savings on to their children amounting to thousands of dollars per year.
For example, a property purchased prior to the enactment of Proposition 13 in 1978 and not transferred to a child until after the passage of Proposition 58 in 1986 would still be assessed at its 1979 value as long as the excluded chain of parent-child transfers remains unbroken. Depending on the present value of the property, that could amount to tax savings in the range of five to ten thousand dollars per year, or more.
Enter Proposition 19. Beginning on February 16, 2021, the parent-child transfers exclusion will only apply to the primary residence of the transferor, and only if the property transferred is used as the primary residence of the transferee. It will also apply to the transfer of a family farm. Additionally, if the property transferred has appreciated by more than one million dollars since the acquisition by the transferor the excess over that appreciation will be subject to reassessment. The one-million-dollar appreciation factor will be readjusted beginning February 2023, and annually thereafter.
Under the current property tax assessment scheme, properties can be transferred into business entities free from reassessment so long as the proportional interests in the property remain the same before and after the transfer. If, for example, a parent owns a property together with two children, each in their individual capacities and each holding 33 1/3 percent, the same property can be transferred into a business entity such as an LLC or corporation owned by the same parent and two children so long as they each own the same 33 1/3 percent proportional interests in the business entity. Thereafter, so long as the entity continues to own the property and does not experience a change in majority ownership (no one individual or entity acquires more than fifty percent) the property will not be reassessed for property tax purposes. These exemptions remain unchanged by the passage of Proposition 19.
The moral of the story, if you own real property and intend to pass that property on to your children, your ability to do so without triggering a reassessment at the time of transfer is about to become much more limited. Particularly if you own multiple properties, the time to plan for how you ultimately want to pass them on is now. At Barilari & Williams, LLP, we’re here to help you not only to plan your estate but also to maximize its value for generations to come. Don’t wait until the last minute for Proposition 19 to limit your options. Call us today for a free consultation.