California voters have passed Proposition 19, which will bring about significant changes in the current law regarding property tax value reassessments. This means time is of the essence for certain property owners to act if they want to preserve California property tax benefits for future generations.
Current law, Proposition 13, caps real property tax values at their purchase price (with small annual adjustments) until there is a change of ownership. When a property “changes ownership,” it gets reassessed at market value.
However, certain changes in ownership within a family are excluded, in whole or in part, from reassessment: (1) a parent may transfer his or her principal residence, regardless of its market value, to children (and in some cases grandchildren) without triggering a reassessment, and (2) a parent may transfer any other real property interests to a child
without triggering reassessment, but only to the extent of $1 million of taxable value (i.e., if the taxable value exceeds $1 million, then the portion over $1 million gets reassessed).
Proposition 19 significantly cuts back or eliminates the parent-child exclusions from Proposition 13 reassessment. Under Proposition 19, a parent may still transfer his or her principal residence to child without triggering reassessment, but only if the child uses the property as his or her principal residence following the transfer, and the exclusion is not unlimited. Only an amount equal to the parent’s tax value plus $1 million is excluded from reassessment; if the market value of the principal residence at the time of the transfer exceeds the total of the parent’s tax value plus $1 million, then the property is reassessed at market value reduced by that total. Importantly, all other transfers of property from a parent to a child will be reassessed at market value.
Limited Window for Action
Fortunately, Proposition 19 does not go into effect until February 15, 2021. This leaves property owners with a limited window to make transfers under the existing rules of Proposition 13. In many circumstances, but not all, it may make economic sense to create or accelerate gifting plans to deal with appreciated real estate; property owners should consider this property tax opportunity in light of their broader estate plan.