CA Prop. 19 passed
With the recent news cycle mostly focused on federal level races including the Presidential election and numerous House and Senate rates, some propositions, like CA Prop. 19 have not received their fair share of time in the news. This may be because CA Prop. 19 disproportionately affects wealthier clients the most.
CA Prop. 19 was passed in California with a narrow majority vote and goes into effect on February 16, 2021. Old law remains in effect until that date. This gives a limited time frame in which to act to transfer certain real estate to your children without reassessment of the assessed property tax value.
Current law falls under Prop. 58, which passed in 1986 and is commonly referred to as the parent-child exclusion, though it should be noted that children can also transfer property to their parent.
Current Prop. 58 allows for two types of transfers –
- Transfers of a primary residence, regardless of value, and
- Up to $1 million of assessed value of other real property, such as second homes and investment property.
CA Prop. 19 replaces Prop. 58 and makes changes to the current options. The second type of transfer above is completely eliminated under Prop. 19. As of February 16, 2021, only transfer will be allowed between parent and child will be allowed and with these two conditions met.
- The primary residence (or family farm) must also become the recipient’s primary residence, and
- The fair market value of the primary residence at the time of transfer cannot exceed the transferor’s assessed value by more than $1 million. If the difference between the fair market value and the assessed value exceeds $1 million, the new assessed value will be the fair market value less $1 million.
The first condition is also very specific. For example, a parent with 3 adult children hoping to transfer the full fair market value of an expensive home but with a low assessed value without reassessment, all 3 children must reside in and share the home, in order to escape reassessment.
This may present an opportunity for clients to gift a property earlier to their children that may not be available later on. It is also possible for a parent to gift a principal residence now to children without reassessment, but for the parent to still continue to use the home. In order for that to occur the parent must then pay rent for the use of the home now owned by the child. For many clients, this is a deal breaker, but for the client who is looking for ways to creatively transfer high value property to their children early without reassessment it is an option.
There are other parts of CA Prop. 19 that are favorable. Beginning April 1, 2021, it allows for those age 55 or older, disabled, or victims of a wildfire or natural disaster to transfer the assessed value of their primary residence to a replacement primary residence without reassessment, across all counties within California. This applies even if the new home has a higher fair market value than the original, but in this case the excess fair market value is added to the original assessed value. Previously only certain counties participated and it was limited to those age 55 or older and you could only take advantage of it one time. Now this can be done up to three times in someone’s lifetime.
However, the real value still lies in the original ability under Prop. 58 to transfer an unlimited value of a primary residence or up to $1 million of other property. The new rules apply regardless of a transfer at death or by a lifetime gift, so proper planning is crucial for those wishing to take advantage of the current Prop. 58 before Prop. 19 comes into effect. So if keeping a low assessed value of your property taxes when property passes to your children is a priority for you, it would be wise to consider your options before the law change. You should consult your estate planning attorney as soon as possible to discuss options available to you.