In the recent November 2020 election, California voters narrowly approved Proposition 19, which makes the following two important changes to the California property tax rules:
Transferring Property Tax Basis of Primary Residence
Most homeowners in California know that their property taxes are based on the property’s assessed value, which can be significantly lower than the actual market value of the property.
Under existing law, homeowners over age 55 or certain disabled persons have a one-time opportunity to transfer their existing property tax assessed value to a replacement residence.
Proposition 19 expands the class of people who qualify for a transfer of their existing property tax assessed value, as follows:
The above is a significant expansion over the current rules which allow for only a one-time opportunity to transfer a homeowner’s property tax assessed value, and only if (a) the fair market value of the replacement home is of equal or lesser value to the original home, (b) the replacement home is within the same county as the original home or is in one of ten counties in California which honors reciprocity, and (c) the replacement home is purchased or built within two years of the sale of the original home.
Significantly Limits Parent/Child Exclusion
By contrast, Proposition 19 effectively eliminates much of the prior parent-child exclusion available to homeowners under Proposition 58.
Proposition 58 excludes from property tax reassessment the following transfers of real property between parent(s) and child(ren):
Proposition 19 changes the above parent-child exclusions in the following ways:
For example, say child inherits a parent’s principal residence at death, and resides there as the child’s principal residence. At the time of death, the home’s assessed value is $700,000, but its market value is $2.5 million. Since the difference between the market value and the assessed value of the home is greater than $1 million, there will be a partial reassessment of the home to $1.5 million (or $2.5 million less $1 million).
However, say the home’s market value is instead $1.6 million. Since the difference between the market value and the assessed value is less than $1 million, the home will not be reassessed when transferred to the child.
Things to Consider
In light of the significant change to the parent-child exclusion, for our clients owning California real properties, you might consider gifts using the existing parent-child exclusion before February 12, 2021[1], particularly under the following circumstances:
[1] County Assessor offices are closed on Monday, February 15, 2021.
This alert should not be construed as legal advice or a legal opinion on any specific facts or circumstances. This alert is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. The contents are intended for general informational purposes only, and you are urged to consult your attorney concern any particular situation and any specific legal question you may have.
- Allows certain homeowners (over age 55, severely disabled, or victims of wildfire or other natural disaster) to move anywhere in the state up to three times to a home of equal or lesser value and bring their property tax assessment with them. This rule takes effect on April 1, 2021.
- Limits the availability of the parent-child exclusion for property tax reassessment purposes. This rule takes effect on February 16, 2021.
Transferring Property Tax Basis of Primary Residence
Most homeowners in California know that their property taxes are based on the property’s assessed value, which can be significantly lower than the actual market value of the property.
Under existing law, homeowners over age 55 or certain disabled persons have a one-time opportunity to transfer their existing property tax assessed value to a replacement residence.
Proposition 19 expands the class of people who qualify for a transfer of their existing property tax assessed value, as follows:
- A qualifying homeowner is a person age 55 or older, a person who is severely disabled, or a victim of wildfire or other natural disaster.
- If the replacement property has a higher market value than the original home, Proposition 19 provides for the increased value to be added to the transferred assessed value. For example, say a homeowner age 60 sells her home at $2 million. The assessed value of the home she sold is $1 million. She buys a new home in California for $4 million. The assessed value of her new home will be $3 million.
- The replacement home may be in any county in California so long as it is purchased or built within two years of the sale of the original home.
- A qualifying homeowner may apply the new transfer rules up to three separate times.
The above is a significant expansion over the current rules which allow for only a one-time opportunity to transfer a homeowner’s property tax assessed value, and only if (a) the fair market value of the replacement home is of equal or lesser value to the original home, (b) the replacement home is within the same county as the original home or is in one of ten counties in California which honors reciprocity, and (c) the replacement home is purchased or built within two years of the sale of the original home.
Significantly Limits Parent/Child Exclusion
By contrast, Proposition 19 effectively eliminates much of the prior parent-child exclusion available to homeowners under Proposition 58.
Proposition 58 excludes from property tax reassessment the following transfers of real property between parent(s) and child(ren):
- Transfers of the principal residence (no value limit); and
- Transfers of the first $1 million of property tax assessed value (which can be much lower than the market value of other property).
Proposition 19 changes the above parent-child exclusions in the following ways:
- First, the $1 million exclusion for a non-principal residence is eliminated entirely.
- Second, the parent-child exclusion for transfers of the principal residence will only apply if the child uses the home as the child’s own principal residence following the transfer. Also, only the first $1 million of the market value in excess of the assessed value will escape reassessment.
For example, say child inherits a parent’s principal residence at death, and resides there as the child’s principal residence. At the time of death, the home’s assessed value is $700,000, but its market value is $2.5 million. Since the difference between the market value and the assessed value of the home is greater than $1 million, there will be a partial reassessment of the home to $1.5 million (or $2.5 million less $1 million).
However, say the home’s market value is instead $1.6 million. Since the difference between the market value and the assessed value is less than $1 million, the home will not be reassessed when transferred to the child.
Things to Consider
In light of the significant change to the parent-child exclusion, for our clients owning California real properties, you might consider gifts using the existing parent-child exclusion before February 12, 2021[1], particularly under the following circumstances:
- If you own a vacation home or rental real property that you wish to be owned in the family for generations to come;
- If you own rental real properties with low assessed value and wish to preserve the current assessed value for your children;
- If you intend to gift real properties to your children in the near future;
- If you currently hold your residence in a qualified personal residence trust (QPRT) that has not terminated, there should be careful attention to any potential property tax reassessment on the residence.
[1] County Assessor offices are closed on Monday, February 15, 2021.
This alert should not be construed as legal advice or a legal opinion on any specific facts or circumstances. This alert is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. The contents are intended for general informational purposes only, and you are urged to consult your attorney concern any particular situation and any specific legal question you may have.
