California proposition 19: Does it help you or hurt you?

California proposition 19 becomes effective on February 16, 2021 and allows homeowners over age 55, disabled or wildfire/natural disaster victims to transfer their primary residence tax base (assessed value for property taxes) to a new residence in California. It also creates a state fire protection services fund to help with the future costs of the large wildfires our state has been experiencing.

To help pay for these changes, proposition 19 changes the taxation of family property transfers. The result is many inheritors will pay significantly higher property taxes or be forced to sell the property.

Before Proposition 19, primary residence transfers between parent and child were excluded from property tax reassessment.  The state did not consider this type of transfer a change of ownership and had no dollar limitations or other restrictions. The transfers could also be from child to parent and between grandparent and grandchild if the parents were deceased.

For family property transfers not involving the primary residence, value reassessment only occurred on the amount above $1 million of assessed value or $2 million on community property.

This allowed many families to pass vacation homes, rental properties, and commercial properties valued at $2 million or less to their children without an increase in property taxes.

After Prop 19 (February 16th, 2021), primary residence transfers for the above family groups are not subject to value reassessment if the inheritor uses the property as their primary residence and the fair market value is not greater than $1 million of the assessed value.  If it is, value reassessment occurs on the amount over $1 million.

Transfers of all other property types are subject to value reassessment.

This means the family vacation home, rentals, and commercial property are subject to value reassessment.  After you pass, the inheritor will receive a “step up” on the property’s value to fair market value. If they sell the property immediately, they will likely be subject to little if any capital gains taxes on the sale. This assumes there is no change in the IRS inherited asset “step up” rules.

If they keep the property, they will have to pay property taxes at the new “assessed value” amount. For Los Angeles County, the rate is 1.25% of assessed value or $12,500 annually per million.

Proposition 19 applies to all family property transfers including property titled under a Revocable Trust, Qualified Personal Residence Trust (QPRT) or Revocable Transfer on Death.

There are options available which can reduce the negative impact of proposition 19. After February 15th, 2021 several of the options below will be less attractive. In addition, new state legislation is required to answer questions created by the Proposition 19 changes which could impact your decision. Each option has advantages and disadvantages and should be thoroughly reviewed with a qualified Trust attorney.

      1. Gift or sell the property to your children before you pass.
      2. Add your child to your deed as tenants in common or joint tenancy.
      3. Gift or sell the property to a Trust (IDGT) Intentionally Defective Grantors Trust with or without a leaseback.
      4. Transfer at least 50% interest in the property to a Trust (IDGT) and create an LLC.

Consideration of the impact to the new assessed value (step up) must be weighed against the value of maintaining a low property tax amount for your children. In addition, Federal gift tax, estate tax and income tax should be considered.

All information is meant to be educational and correct as of the date of this article.  This article is limited to proposition 19 and its impact. Please contact your Trust attorney for your unique circumstances. If you do not have a Trust attorney, please contact us.

This article was adapted from a presentation by Kevin J. Moore, LLM, Kevin J. Moore & Associates, 301 E. Colorado Blvd., Suite 600 Pasadena, CA 91101 (626) 568-9300 kmoore@kjmlaw.com and a presentation by the San Francisco Assessors Office on January 5, 2021.

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