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Navigating New California Proposition 19: Its Dramatic Property Tax Increase on Inherited Property and Added Benefits to Portability For Those 55 and Older

  • November 29, 2021
  • devinlucas

Proposition 19, new for 2021, has two main components, portability and inheritance.

As a brief summary (and review below, as well as our related articles and videos)…

The BAD news….

1) Inheritance: Proposition 19 dramatically limits the ability to pass along the existing Proposition 13 property tax basis to a child or grandchild via gifting, inheritance or sale and is effectively a death tax or inheritance tax on the next generation. (read below, watch our video below, or skip to our inheritance specific discussions for a detailed breakdown)

The GOOD news…

2) Portability: Proposition 19 allows those 55 and older (or certain disaster victims) to sell your home and transfer your existing Proposition 13 property tax basis to a new home, in any California County, and for any price (i.e. a replacement home of a higher price, and you simply pay the difference). (read below, or skip to our portability specific article for a detailed breakdown)

Article below; video below….

Lucas Real Estate – Attorney Devin Lucas and CPA Courtney Lucas – are experts in California intra family transfers using all aspects of Propositions 13, 58, 193, 60, 90 and new Proposition 19. Learn more about how Lucas Real Estate may help your family transfer by clicking here.

Questions? – Paid one-hour confidential legal consultations are conducted daily via Zoom and address virtually all questions, options, tax implications and strategies. (Book a consultation here.)

Read on to learn more and/or watch our late 2020 (implementation) presentation here:

Let’s discuss both aspects, first, Portability (GOOD)….

HOW DOES PROPOSITION 19 WORK TO TRANSFER EXISTING TAX BASIS FOR THOSE 55 AND OLDER?

Simply put, Proposition 19 allows those 55 and older (or certain disaster victims) to sell your home and transfer your existing Proposition 13 property tax basis to a new home in any California County and for any price of real estate, higher or lower (though only the sale of the current residence is carried over, you simply pay an adjusted tax basis for any purchase price greater than your sales price).

The two transactions must occur within two years of each other, but it does not matter in which order. In other words, you can buy the replacement property first, then sell. Practically, for most people, they will have to sell their home first, in order to purchase the replacement. A “sale or purchase” occurs when title to the property is transferred (e.g., date of close of escrow). “Construction” occurs as of the date of completion. The taxpayer must actually own and occupy the new property as his or her principal residence within this period.

Proposition 19 replaces the earlier Proposition 60 (around since 1986) and Proposition 90 (around 1988) and is effective April 1, 2021. Propositions 60 and 90 are now moot, replaced entirely with this new law. You can qualify even if a property closed prior to April 1, 2021, as long as the subsequent sale or purchase takes place within two years and on or after April 1, 2021.

Proposition 19 is an improvement on the portability laws, changing the earlier Propositions 60 and 90 to now mandate all California counties to participate (earlier, they had to opt in), allowing a replacement home of greater value (earlier, the replacement home had to be equal or lesser value) and allowing this law to be used up to three (3) times (earlier, it could only be used once).

How to figure your new basis:

Simply put…

  • if your new home is “equal or lesser value” (which, actually now has the same definitions as earlier Prop 60 and 90, which is 100% of value if the new home is purchased first, 105% of value if the replacement property is purchased or newly constructed during the first year after the sale of the original property, and 110% if the replacement property is purchased or constructed during the second year after the sale of the original property) then your property tax remains the same.
  • If your new home is more expensive than your old home, you get full credit for the value up to the sale of your old home, then simply pay ‘new’ property taxes on the difference in the purchase prices, generally at 1%, but check with your county.

A few examples:

For example, an original home was sold and had a full cash value of $1,400,000 and a factored base year value of $100,000 at time of sale. If a replacement home is purchased for a full cash value of $1,600,000, the difference of $200,000 ($1,600,000 – $1,400,000) is added to the factored base year value of $100,000. Thus, the replacement home will have a new base year value of $300,000 ($100,000 + $200,000).

For example, an original home was sold and had a full cash value of $400,000 and a factored base year value of $100,000 at time of sale. If a replacement home is purchased for a full cash value of $600,000, the difference of $200,000 ($600,000 – $400,000) is added to the factored base year value of $100,000. Thus, the replacement home will have a new base year value of $300,000 ($100,000 + $200,000).

For example, an original home was sold and had a full cash value of $4,000,000 and a factored base year value of $1,000,000 at time of sale. If a replacement home is purchased for a full cash value of $6,000,000, the difference of $2,000,000 ($6,000,000 – $4,000,000) is added to the factored base year value of $1,000,000. Thus, the replacement home will have a new base year value of $3,000,000 ($1,000,000 + $2,000,000).

For a more detailed breakdown of the new portability features of Proposition 19, please review our in depth article here, What, Exactly, Is My New Property Tax Under Proposition 19 Portability For Those 55 and Older.

Now, the more complicated portion of inheritance (BAD)…

HOW DOES PROPOSITION 19 WORK AS TO FAMILY TRANSFERS, INTRA-FAMILY SALES AND INHERITED PROPERTY?

As of February 16, 2021, if you transfer your property to your children (or, grandchildren, if the parents are deceased), via any means (gift, sale, hybrid, estate plan after your passing, etc.) that property will be reassessed to full market value for annual property tax purposes. 

Due to Proposition 19, your children will no longer inherit your Proposition 13 value, or, “prop 13 basis” as had been California law for nearly 25 years (under former Proposition 58 and Proposition 193).

Only one limited exception will apply (detailed below), but all investment properties, even if the child plans to live in it, will be reassessed to full value upon transfer.  

This revokes the long-standing tax benefits of Proposition 58 and Proposition 193 (detailed article on the enormous benefits of Proposition 58 and Proposition 193 here), overwhelmingly passed in November 1986 and March 1996, respectively, which allowed parents to transfer their property tax basis of a primary residence (regardless of value) to their children and up to $1mm of assessed value of all other property ($1mm of the prop 13 value on rental properties or other investment properties passed to heirs, not based on fair market value, effectively allowing far more than $1mm of property value to transfer while retaining the low bill).  These propositions – Proposition 13, Proposition 58 and Proposition 193 – saved children thousands upon thousands of dollars per year.  (read here to understand dramatic savings of [now gutted] Proposition 58 and Proposition 193.)

No more.  Special interests have uprooted this hallmark financial protection for California homeowners and passed a new death tax and inheritance tax on real property owners via Proposition 19.  As of February 16, 2021, full reassessments will occur on all family transfers, with limited exceptions detailed below.  

If a death or notarization occurred prior to February 16, 2021, you may be able to take advantage of the ‘old’ proposition 58 and proposition 193. Otherwise, as of now, all new family transactions (including sales, gifts and death) will be subject to Proposition 19.

Areas with the highest property values, such as Newport Beach, Laguna Beach, Coastal Orange County, San Francisco Bay Area, etc., will be impacted the most by Proposition 19; overall, per the Legislative Analyst’s Office, California’s next generation of property owners will be taxed to the tune of hundreds of millions of dollars per year as an anticipated impact of California Proposition 19.  Groups such as the Howard Jarvis Taxpayers Association would argue that figure is more likely in the Billions, with a “B”.

ONE LIMITED EXCEPTION – “FAMILY HOME” WORTH UNDER $1,000,000 AND A BLENDED RATE IF WORTH OVER $1MM

One limited exception to full reassessment exists: the transfer of a “family home” (meaning a home the parents currently live in), to a child, where the child will live in the “family home” within one year of transfer, but only if the home’s fair market value at the time of transfer is less than one million dollars ($1,000,000).  If the home’s fair market value at the time of transfer is greater than one million dollars ($1,000,000), then a complicated formula takes over to blend the old prop 13 basis rate with the portion of the home over one million dollars ($1,000,000).

In other words, there is a new three-part test to qualify for Prop 19:

  1. The property must have been the parent’s primary residence at the time of the transfer or death.
  2. The child must then live in the property, and make it their primary residence, within one year of the transfer or death.
  3. If the home’s fair market value at the time of transfer or death is greater than one million dollars ($1,000,000), then you will get an increased property tax bill for anything above the old basis plus $1,000,000 (see below on how to determine your new bill).

This will result in some benefit for many (vs. a full reassessment), but is still a dramatic tax on inherited real property.  $1mm is a pretty low threshold for California real estate, especially in Newport Beach and other coastal areas, and by no means indicates the owners are “rich.”  Indeed, many families purchased homes decades ago for modest sums, only to see their sound investments increase in value, but that does not mean they can afford to pay taxes based on those higher values.  That was the whole point of California’s landmark Proposition 13, and its later offspring with Proposition 58 and Proposition 193.

If the home was not the primary residence of the parents, a full reassessment will occur, even if the child plans to live in that home.  No benefit will convey.

If the home was an investment property, or a rental, a full reassessment will occur, even if the child plans to live in that home.  No benefit will convey.

NOTE – Uncertainty exists surrounding some aspects of Proposition 19’s implementation. The state is issuing updated guidance, counties are working on their own interpretations, and eventually challenges and lawsuits are likely to further define Proposition 19 for the years to come. You should consult with legal counsel and contact your county’s Assessor to discuss specific impacts to your home.

What, Exactly, Is My New Property Tax Under Proposition 19 Family Transfers?

If you qualify under the new Prop 19, the basic new formula is as follows:

(“new” property tax basis) = ((Fair Market Value) – ((old property tax basis) + $1,000,000)) + (old property tax basis))

To attempt to state that plainly: You get the OLD basis, PLUS $1,000,000, to make the new basis. IF the fair market value is ABOVE that new figure, you will get taxed (at 1%) on anything over the new number.

For a detailed review and understanding of how to calculate your new Prop 19 property tax on inherited property, read our in-depth article on calculating your new Prop 19 tax here.

What Is The Fair Market Value and Who Will Determine?

The County Assessor. Each County’s Assessor is charged with this task, not an easy one. Computers will generate many values, and it will be up to the new property owner to potentially dispute the County’s new assessments (if they feel a dispute is warranted, and could prevail in such a dispute – a simple check of local sales and/or an appraisal will help your case for, or against, the County’s determination).

WHAT CAN YOU DO / HOW TO PLAN AND STRATEGIZE FOR PROPOSITION 19 AND PRESERVE YOUR PROPOSITION 13 BASIS FOR YOUR CHILDREN?

Unfortunately, given Proposition 19 is now in effect, all new transfers (via sale, gift or death) are subject to Proposition 19.

You should consult your California state representative to express your concerns (click here to find your local elected officials). There are groups, such as the Howard Jarvis Taxpayer’s Association seeking to ‘reinstate 58’ and bring back the prior laws and benefits. We urge you to contact your representatives and/or join the Howard Jarvis Taxpayer’s Association if you are interested in bringing back the old benefits.

Prior to Proposition 19’s implementation, we had suggested families strongly consider an outright transfer of the property (via sale, gift or a hybrid of the two) before February 15, 2021. A typical Trust will NOT work to avoid the reassessment (see below). However, since this deadline is passed, you are now subject to Prop 19 rules.

You can still gift your property to your children, sell your property to your children, or a hybrid of the two, but will have to qualify under Prop 19 or face a reassessment. (Our earlier article, linked here, explains the various options for such a gift or sale, and the enormous benefits of Proposition 58 and Proposition 193 that will lapse on February 16, 2021.)

DOES MY WILL OR TRUST WORK TO CIRCUMVENT OR BYPASS PROP 19 AND PASS BY PROP 13 BASIS TO MY CHILDREN?

NO. A typical will or a typical trust will NOT work to bypass Proposition 19. Trusts are essential estate planning devices and work to avoid probate (i.e. a court process after your death), but it will NOT change the law as to Prop 19. When you pass away, that is the trigger for the property transfer. If you pass away on or after February 16, 2021, your property will be fully reassessed, even if held in a Trust.

However, there are “irrevocable trusts” that actually change the beneficial ownership at the time of creation and MIGHT be a workaround. Some attorneys were drafting these prior to Prop 19’s implementation and time will determine their effectiveness.

WHAT ABOUT AN LLC OR FAMILY LIMITED PARTNERSHIP OR ANY OTHER CREATIVE WORKAROUND AS A STRATEGY TO AVOID A PROP 19 REASSESSMENT?

LLCs and Family Limited Partnership have been around for a long time and are often used by high-net-worth individuals and families for tax, estate planning and liability protection purposes. Entities have always had different rules than family transfers, and those rules will remain in place regardless of Proposition 19.

While LLCs and Family Limited Partnership can be used to avoid reassessments when fractional interests are transferred, they must be created precisely right to achieve the desired goal and simply do not work for all families. When too much ownership or control is transferred (generally over 50 percent), a full reassessment of the property will occur.

Moreover, there’s annual tax , maintenance and creation costs for such entities. The entity rules are beyond this article but can be used by some families to hold real estate and avoid reassessments.

WHAT ABOUT JOINT TENANCY AS A STRATEGY TO AVOID REASSESSMENT DUE TO PROP 19?

Holding title in “joint tenancy” (or as “joint tenants”) can be used under the right set of circumstances to avoid property tax reassessment, at the time of the transfer, but will still result in a reassessment at the death of the original owner(s).

Joint tenancy has always been used to help avoid probate for those that do not want the formalities, complexities or expense of a trust. But it is not the right vehicle for most people and will still be subject to Prop 19 upon death or transfer.

[NOW MOOT DISCUSSION] WHY NOT TRANSFER PRIOR TO PROP 19 IMPLEMENTATION? / CONSIDERATIONS FOR ANY FAMILY TRANSFER

FOREMOST, since Prop 19 is now in effect, this is moot as to avoiding Prop 19, but still considerations to address if thinking of a transfer. For illustrative purposes, people still considering a transfer now, and people with regret for missing the deadline, review these considerations which indeed caused many families to not transfer, even under the prior laws…

The Step-Up In Basis, aka stepped up basis, aka step up basis.  This favorable tax law currently provides better tax benefits to your heirs at death, vs. during life, by dramatically reducing the capital gains on a sale of real estate post death.  (again, detailed here in our prior article).  However, President-elect Joe Biden proposes elimination of this tax benefit (citations below). Planning on the future of tax laws is always difficult. We know these property tax increases will occur on transfers after February 15, 2021; we do not know what the future holds for the step up in basis.  If the step-up in basis is eliminated, and the transfer occurs after February 15, 2021, that could be an upsetting double tax increase to the heirs. 

An existing loan on the property.  This must be addressed, as an outright transfer would likely violate the “due on sale clause” of the current loan.  Often, the child can “purchase” the home (for any value, fair market or not), obtain a new loan to pay off the old loan, and potentially even use additional equity in the home for the parent’s or children’s benefit. 

Simply not ready to give away assets until death.  This is, of course, a personal decision.  Future tax laws may become more favorable, or less, overtime.  Many make estate planning decisions around these laws; many do not care.  

WILL THIS BE REVERSED OR CHANGED IN THE FUTURE?

This was a constitutional amendment by ballot proposition. It will likely take a new ballot proposition to “undo” or change Prop 19 (i.e. to reinstate the benefits of Prop 58 and Prop 193).

Impacted voters should contact their elected representatives to discuss their view (lookup your representative here: findyourrep.legislature.ca.gov) and consider membership or donations to organizations such as the Howard Jarvis Taxpayers Association that advocate for property owners and are seeking to reinstate the former Prop 58 and 193.

FAQ on Inheritance

Indeed, many unanswered questions remain and further clarification, rules, amendments and litigation will result. For now, below are some FAQ from the BOE. They note “it is anticipated that these FAQs will be updated periodically with additional questions, particularly if legislation is enacted or further guidance is issued by the Board. Please check back often for updates.” You can review directly here: https://www.boe.ca.gov/prop19/#FAQs

For FAQ as to the portability aspects, review our portability specific article here.

Q. Is Proposition 19 retroactive and would it cause property transfers that have already received the benefit of Proposition 58 (Parent-Child Exclusion) to be reassessed?
A. No, Proposition 19 is clear that Proposition 58 applies to transfers that occur on or before February 15, 2021, and that Proposition 19 applies to transfers that occur on or after February 16, 2021.

Q. If a family home is gifted to two children, do both children have to reside in the family home as their primary residence in order to receive the parent-child exclusion?
A. We believe the intent of the Legislature was to allow the exclusion as long as the parent’s family home becomes the family home of at least one of the children.

Q. Under Proposition 19, if I inherit my parent’s family home and move into it and establish it as my principal residence, must I live continually in the home to receive the parent-child exclusion? What happens if I move somewhere else?
A. We believe that at least one eligible transferee must continually live in the property as his or her family home for the property to maintain the exclusion. Thus if the property is no longer your family home, it will receive a new taxable value. The new taxable value will be the fair market value of the home on the date you inherited it, adjusted each year for the inflation factor, which is published by the BOE annually.

Q. Does Proposition 19 apply to a transfer of a rental home?
A. No, Proposition 19 limits the parent-child exclusion to a transfer of a family home that is the principal residence of the transferor and becomes the principal residence of the transferee.

Q. Do we need to submit our application for the parent/child exclusion prior to the February 16, 2021 operative date to qualify for the exclusion under Proposition 58/193?
A. As long as the date of transfer or change in ownership of real property between parent and child occurs on or before February 15, 2021, the transfer will qualify for the exclusion under Proposition 58/193. Therefore, as long as the claim is filed with the County Assessor within three years of the date of transfer or before a transfer to a third party or within six months of the date of notice of supplemental or escape assessment. Thus, the claim does not need to be filed by February 16, 2021.

Q. Will I lose the parent-child exclusion if the value of the family home is greater than $1 million dollars?
A. The value limit under Proposition 19 is the sum of the factored base year value plus $1 million. If the market value exceeds this limit, partial relief is available. The amount exceeding the excluded amount will be added to the factored base year value.

For example, a family home has a factored base year value (FBYV) of $300,000 and a fair market value of $1,500,000. The excluded amount under Proposition 19 is $300,000 + $1,000,000 = $1,300,000. The difference, $1,500,000 – $1,300,000 = $200,000. Thus, the adjusted base year value is $500,000 (FBYV $300,000 + difference of $200,000).

Q. If a parent died prior to the February 16, 2021 operative date and the Assessor does not become aware of the death until a year later and reassesses the property as of the date of death, are the parent-child exclusion provisions applied under Proposition 58 or Proposition 19?
A. The date of death is the date of change in ownership. The law in effect as of the date of death will apply. Proposition 19 is clear that Proposition 58 applies to transfers that occur on or before February 15, 2021, and Proposition 19 applies to transfers that occur on or after February 16, 2021.

Q. I have my deed signed and notarized, and have submitted it for recording at my local County Recorder’s office prior to the February 15, 2021 deadline. What if my deed does not record by the February 15, 2021 deadline? Must my deed be recorded prior to that date in order to still be under the Proposition 58/193 provisions?
A. No. As long as the date of transfer is on or before February 15, 2021, the transfer will qualify for the Proposition 58/193 exclusion. Property Tax Rule 462.260 makes clear that the recordation date of a deed is rebuttably presumed to be the transfer date. This means that if evidence is shown that the transfer occurred prior to the recordation date, the assessor should accept that earlier date. Such evidence could be, for example, the date of a notarized document of transfer, such as a deed.

Q. How is a property held in a trust affected by Proposition 19?
A. The administration of a trust is governed by the trust instrument itself. For properties held in trusts, Revenue and Taxation Code section 61(h) provides that a change in ownership occurs when any interests in real property vest in persons other than the trustor or the trustor’s spouse or registered domestic partner when a revocable trust becomes irrevocable (also see Property Tax Rule 462.260). This typically occurs upon the death of the trustor. Thus, the date of death is considered to be the date of change in ownership. Proposition 19 is clear that Proposition 58 applies to transfers that occur on or before February 15, 2021, and Proposition 19 applies to transfers that occur on or after February 16, 2021.

Q. How do I apply for the homeowners’ exemption or disabled veterans’ exemption within one year of the transfer to qualify for the parent-child or grandparent-grandchild exclusion, as required by Proposition 19?
A. To apply for the homeowners’ exemption or disabled veterans’ exemption, a claim must be filed with the County Assessor. BOE-266, Claim for Homeowners’ Property Tax Exemption, is the claim form to apply for the homeowners’ exemption, and BOE-261, Claim for Disabled Veterans’ Property Tax Exemption, is the claim form for the disabled veterans’ exemption. Both forms can be obtained from and submitted to the local County Assessor’s office where the property is located.

CONCLUSION

Again, this new property tax increase of Proposition 19 cannot be understated.  Family transfers (via sale, gift or death) as of February 15, 2021 on all rental properties, all investment properties, and any properties not used as the parents’ primary residence, will result in reassessments to full market value, potentially resulting in thousands upon thousands of dollars in new annual property taxes to the next generation of owners, even if the children plan to live there.  Family transfers starting February 15, 2021 on family homes where the parents reside at transfer, and the children will live within one year of transfer, worth over $1mm in today’s value, will result in a partial reassessments, potentially resulting in thousands upon thousands of dollars in new annual property taxes to the next generation of owners.  

Property owners should have a frank analysis today about their estate planning and if a transfer, sale, or gift is right for them at this time.  Consult appropriate professionals familiar with these existing and new laws.   

– Devin Lucas

Author Devin R. Lucas is a Real Estate Attorney, Broker and REALTOR®, specializing in Newport Beach, Costa Mesa and Orange County coastal communities, serving individual and investors in residential real estate.

Lucas Real Estate – Attorney Devin Lucas and CPA Courtney Lucas – are experts in California intra family transfers using all aspects of Propositions 13, 58, 193, 60, 90 and new Proposition 19. Learn more about how Lucas Real Estate may help your family transfer by clicking here.

Questions? – Paid one-hour confidential legal consultations are conducted daily via Zoom and address virtually all questions, options, tax implications and strategies. (Book a consultation here.)

Lucas Real Estate
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949.478.1623 office | 888.667.6038 fax
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SOURCES:

Official California Proposition 19 Voter Guide:

https://voterguide.sos.ca.gov/propositions/19/

Official California Proposition 19 Voter Guide – Legislative Analyst’s info: 

https://vig.cdn.sos.ca.gov/2020/general/pdf/prop19-title-summ-analysis.pdf

Official California Proposition 19 Text of Proposed Laws:

https://vig.cdn.sos.ca.gov/2020/general/pdf/topl-prop19.pdf

California Constitution, Article XIII:

https://leginfo.legislature.ca.gov/faces/codes_displayText.xhtml?lawCode=CONS&division=&title=&part=&chapter=&article=XIII

Details of President-elect Joe Biden’s proposal to eliminate the Step-Up In Basis, aka stepped up basis, aka step up basis:

https://taxfoundation.org/joe-biden-tax-plan-2020/#Details

https://www.politifact.com/factchecks/2020/oct/29/facebook-posts/yes-biden-seeks-eliminate-policy-reduces-inheritan/

https://www.forbes.com/advisor/retirement/biden-tax-policy-step-up-in-basis/

California Board of Equalization (https://www.boe.ca.gov/prop19)

California Association of REALTORS, Property Tax-Exemptions From Reassessment and Prop 19 Implementing Legislation.

California Board of Equalization Property Tax Rule 462.540(a)(1)

IRS Topic No. 701, Sale of Your Home (https://www.irs.gov/taxtopics/tc701).

IRS Publication 523, Selling Your Home (https://www.irs.gov/publications/p523)

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The content on this blog is for informational purposes only. Nothing on this blog should be construed to be legal advice, and you should not act or refrain from acting on the basis of any content on this blog without seeking appropriate legal advice regarding your particular situation, from an attorney licensed to practice law in your state. The content on this blog is not guaranteed to be correct, complete, or up to date. Devin R. Lucas’ office is in Newport Beach, California and is only licensed to practice law in California. Please be advised that Devin R. Lucas only provides legal services or advice pursuant to a written legal services agreement. The content on this blog is not intended to, and does not, create an attorney-client relationship between you and Devin R. Lucas, nor does our receipt of an email or other communication from you. Some jurisdictions may consider this site to constitute attorney advertising; accordingly, please be advised this is an advertisement.

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