This coming Valentine’s Day, your local California county assessor will be giddy in anticipation of what is to come because two days later -- Proposition 19(1) will go into effect. As a result, property tax envelopes will soon need to be returned with much larger checks from their beloved taxpayers who have received a transfer of real property from a parent or grandparent.
Under the rule changes in Proposition 19, California will no longer allow a parent or grandparent to transfer real property (by sale or gift) to a child or grandchild without an increase in property taxes – with only very limited exceptions.
CHANGES FROM NEW LAW IN A NUTSHELL
Basically, any family transfer that does not involve the primary residence of the transferor that then becomes the primary residence of the transferee will no longer qualify for an exclusion and will instead trigger a reassessment for a new base value independent of the former Proposition 13 base value.[2] , regardless of how long the real property has been passed down through generations in a family.
In a nutshell, Proposition 19 includes the following big changes – one a carrot and one a stick.
- THE CARROT: The property tax base with Proposition 13 limits on annual increases can be transferred up to three times (instead of the current one time for those 55 and older) to new property statewide (instead of currently only within a county or to the few reciprocal counties) by property owners who are:
- Age 55 or older (previously limited to one time within the same county or within a few counties offering reciprocity),
- Severely disabled, or
- A victim of a wildfire or other natural disaster.
- THE STICK: The parent-child and grandparent-grandchild exclusion from reassessment no longer applies except for primary residence – and only then for the first $1 million of value above the transferor’s then-current assessed value.
- The property must be used as a primary residence of the transferor.
- Upon the transfer, it must become the recipient child or grandchild’s primary residence with the filing of a homestead exemption[3] within one year of the transfer.
- There is no longer immunity from the step-transaction doctrine for back to back transfers for non-primary residences before putting them in an entity.[4]
ILLUSTRATION
A home of a grandparent with an assessed value of $300,000 but a current value of $1.5 million will go from[5] being taxed at a little over $3,300/year to a little over $16,500/year[6] unless the children or grandchildren agree on at least one of them making the property a primary residence. Even then, the limitation on the exclusion is only for the first $1 million of value over the $300,000 original assessed value, the $200,000 excess would result in an increase in the annual property taxes to about $5,500/year. If the property is worth $2 million, then even with the exclusion of the first $1 million over the $300,000 assessed value, the $700,000 excess would result in an increase in annual property taxes of about $7,700 to $11,000/year.
TAKE ACTION NOW BEFORE FEBRUARY 16
Families still have from now through February 15, 2021 to make transfers that will allow for continued low property taxes for at least the next generation. Anyone with low assessed value property should consider taking advantage of this small window through Valentine’s Day.
Please reach out to the estate planning attorneys at Berliner Cohen, LLP if you would like to discuss Proposition 19 and potential gift and/or sale strategies that are available under current law and will not be available after February 15, 2021.
[1] With 90% of the unofficial vote reported as of Veterans Day, November 11, 2020, it appears that Proposition 19 is passing 51.1% to 48.9%.
[2] Certain farm property also qualifies.
[3] Filing a homestead will likely result in the transferee becoming liable for California income tax on worldwide income even if the transferee is in California for part of the year and less than presumptive residency arising from being in California nine months of the year).
[4] From February 16, 2021 onward, the step-transaction doctrine could be applied to collapse the two transfers as one and cause a 100% reassessment of the property in some circumstances even if the transferee only received a small interest before the contribution to the entity.
[5] $1.5 million current value – ($300,000 + $1 million) = $200,000 not excluded. Tax increase on $200,000 excess at 1.1% =$2,200.
[6] Roughly 1.1% plus some locally imposed taxes for bonds, etc.