THE PROPOSITION 19 SURPRISE

Written by Stephanie F. Bezner, Esq.

Proposition 19 was adopted by voters in November 2020 and became law in February 2021. While this means more flexibility for homeowners over age 55 to maintain their property tax basis when moving, all Californians have far fewer options for transferring their properties to their children.

Before Proposition 19 was adopted, parents could transfer their primary residence and other properties to their children without property tax reassessment as long as the sum of the assessed value of other properties did not exceed $1 million (there was no cap on the primary residence). Now parents can no longer transfer other properties to their children without property tax reassessment and are limited in their ability to transfer their primary residence. The transfer of a primary residence from parents to children will only escape reassessment if the fair market value of the property on the date of transfer does not exceed the assessed value of the property plus $1 million and a child makes the residence their primary residence.

Gone are the days when children can keep their parents’ house as a rental property with low property taxes. The new law also means some children who live with their parents will be unable to continue living in their parents’ residence without a large property tax reassessment. Take, for example, parents who purchased their home in the South Bay 46 years ago for $75,000 and the property is now worth $2 million. The assessed value of the parents’ house for property tax purposes would now be approximately $183,000, based upon the 2% per year increase under Proposition 13.

If their child lived with them, they might gift the property to such child at the time of the death of the surviving spouse. Before Proposition 19, the child would have kept the same property tax basis. Now, because the property is worth more than $1.183 million, the child would have a modified property tax basis of $1 million (the difference between current market value of $2 million and $1.183 million, which is $817,000 plus the original assessed value of $183,000). This would result in a more than five-time increase in property taxes!

Parents can undertake some planning during life to mitigate the impacts of Proposition 19, but when leaving real property to children, the landscape has changed dramatically.

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