Q. I understand that the recently passed Proposition 19 on the California Ballot will make major changes in the property tax structure. Is that true?
A. Yes, indeed. California voters just narrowly approved Proposition 19, overhauling our property tax rules originally stemming from the passage of Proposition 13 in 1978. Most notable are the new restrictions to the parent-child exclusion established by “Prop 58” in 1986.
Here are some of the features of the new law, with the corresponding “winners” and “losers”:
The “Winners”:
Seniors over age 55, persons who are severely disabled, and victims of wildfires or natural disasters, are the “winners”, as the new law allows them to transfer their home’s low property tax rate to the purchase of a replacement home anywhere in the state, albeit with only modest adjustment in property tax if the replacement home’s taxable value is more than the original residence. Under existing law, seniors could only opt to do so if they purchased a replacement home within their own county (or within nine (9) designated other counties who opted into the program), and then only once in a lifetime. After April 1, 2021, this new right may be exercised up to three (3) times during lifetime by seniors’ and the disabled, and unlimited times by victims of natural disasters, all so long as the re-purchase occurs within two (2) years of the sale of their original residence.
The “Losers”:
Children, who had hoped to inherit their parents’ home and up to $ One Million of other property, along with their parents’ low property tax rate, are the losers. Since the passage of Prop 58 in 1986, children have been able to retain their parent’s low tax rate when property passed from parents to children via sale, gift or inheritance. That blanket rule has now been substantially modified: Under newly enacted Prop 19, a child will not be able to assume his parents’ low property tax rate for their home, unless the child actually moves into the parents’ home and claims it as his own principal residence within a year of the transfer. This will pose problems for children who already have their own homes. Further, even if the child moves in, the carry over tax rate will still be increased if the value of the home upon transfer to the child is greater than $One Million more than the parent’s taxable value. Still further, there will be no carry over tax benefit at all for the transfer of non-residential property.
This move-in requirement and the prospect of some property tax increase even then, will make it more difficult for children to inherit and keep their parent’s home and other real property. Many will be forced to sell.
Window of Opportunity: The effective date of the new rules regarding the Parent–Child Exclusion is 02/16/2021. This delayed effective date creates a short window of opportunity for those parents who wish to pass their homes and other property, along with their low property tax rate, to their children under existing law. But before any parent does so, he or she should first consider the “downside” of doing so, including the following:
(1) Capital Gains Taxes: A present transfer surrenders the adjustment to the property’s cost basis at the parent’s death, which would otherwise eliminate all taxable appreciation from the time of the parent’s original acquisition to the time of the parent’s death. This loss would substantially increase the capital gains tax payable when the child later sells the property;
(2) Long Term Care Needs: The possible effect of such a transfer on the parent’s eligibility for a Medi-Cal subsidy to help finance long term care.
Need for Amendment to Estate Plans? Given the looming disparity in property tax treatment of residential versus non-residential (investment) properties after 2/16/2021, there may also be need for parents — who own both kinds of properties — to reconsider their existing estate plans, so as to preserve fairness among their children who wish to retain their inherited properties, thus “burdened” with increased property taxes. Alternatively, in order to discourage post-death challenges by disgruntled children, parents may wish to include recitals in their trust and related documents that they have at least considered these potential disparities in making their bequests to their children.