The narrow passage of Proposition 19 in the November election creates significant changes to the property tax assessment rules for California parents (and grandparents of parents are deceased) who want to transfer ownership of real estate property to their children or grandchildren. These changes, which take effect on February 16, 2021, will make the majority of these transfers far more costly. This has created urgency among many California property owners to take action ahead of the upcoming deadline in order to protect their wealth for the next generation.
If you are a parent or grandparent who is considering a property transfer, it is important to act quickly to avoid the consequences of the rule changes under Proposition 19. Call Garmo & Garmo today at 619-441-2500 to set up a free consultation with one of our experienced real estate and estate planning lawyers.
History and Previous Rules for Family Property Transfers in California
Proposition 19 is an amendment to rules that were originally created by Proposition 13 in 1978 and Proposition 58 in 1986. Proposition 13 limits increases in the “taxable value” of real property to 2% per year, and the property is reassessed to market value only when it changes ownership.
For example, if you paid $500,000 for home in 2000, the maximum assessed value (with a 2% annual cap) would be $742,974 in 2020. We know that in most areas of California, the market value of real estate property has appreciated at annual rates much higher than 2%, and it is not uncommon for a property that was worth $500,000 20 years ago to be worth several million dollars today.
Although Proposition 13 provided much-needed certainty to California property owners about future tax liability, there were increasing complaints about children getting hit with huge property tax bills when they became owners of their parents’ property. Proposition 58 addressed this issue by changing the California Constitution to help protect these transfers from major tax reassessments.
Proposition 58 made two very important amendments to the state Constitution:
- A primary residence can be transferred to children or grandchildren with no value limit, and the new owner(s) can use the property for any purpose (e.g., live there, rent it out, use it as a vacation home, etc.)
- For real property other than the primary residence, up to $1 million in assessed value can be transferred to children or grandchildren without reassessment.
Transfers can be made via a gift, sale, or inheritance, and transfers through a trust also qualify for this exclusion.
What Is Changing Under Proposition 19?
Proposition 19 repeals Proposition 58 (1986) and forces transferred or inherited property within families to be reassessed under most circumstances. The current law allows a parent or grandparent to transfer ownership (without reassessment) of their primary residence without any value cap, and to transfer other properties with a $1 million value cap – regardless of how the child chooses to use the property.
The new law requires the child(ren) to make the property their primary residence, or the property tax value will be reassessed. And even if they do decide to live in the property, there is a $1 million value cap on the reassessment exclusion.
So, if the market value of the property has increased by $1 million or less, then no reassessment is needed. However, if the parents had the property for a long time and the market value has increased by more than $1 million, then any additional amount (above the $1 million) would be added to the tax assessed value. This could cause a major spike in the property tax bill after a property transfer between families is made.
Contact Our Southern California Estate Planning Lawyers
If you are planning to leave your children or grandchildren real estate property, taking action before the February 15, 2021 deadline could be extremely important in order to avoid an expensive property tax reassessment. As this matter is very time sensitive, it is best to get in touch with the attorneys at Garmo & Garmo as soon as possible to discuss your options.
Call our La Mesa office today at (619) 441-2500 or message us online for your free consultation. We look forward to serving you!