California

Proposition 19

Proposition 19 amends the California Constitution by adding sections that provide further expansion and qualifications regarding limitations on property tax increase for persons OVER 55, the severely disabled, victims of wildfires or other natural disasters (collectively referred to as “eligible homeowners”) and transfers of certain inherited properties.

Eligible Homeowners:
Effective April 1, 2021, location restrictions were removed allowing eligible homeowners to:

Move Anywhere in the State - The taxable value of a primary residence may be transferred to a replacement primary residence anywhere within the state, as long as it is within two years of the sale of the original primary residence.

If Purchasing a More Expensive Home - A home of greater market value may be purchased without incurring a substantial increase in taxable value. The property tax bill would still go up but not by as much as it would for other home buyers.

Increase the Use of the Transfer - Homeowners who are over 55 or severely disabled could transfer the property’s taxable value up to three times in their lifetime.

Inherited Properties:
Effective February 16, 2021, the following qualifications apply to inherited properties:

Continued Use as Primary Residence or Family Farm - The reassessment exemption on inherited properties would apply only if the property is used by the child (or grandchild under certain circumstances) as their primary residence, or if the property is a family farm. Properties used for other purposes would not qualify for the exemption.

Increase for High-Value Inherited Homes and Farms - If the current market value of an inherited property exceeds the parent’s taxable value by more than $1 million, then the child taxable value shall be assessed as the current market value less $1 million*.

Proposition 13

Let's break down what Proposition 13 (Prop 13) is about in simpler terms:

Acquisition Value System: Under Prop 13, the value used to calculate property taxes is based on the price the property was bought for, rather than its current market value.

Tax Cap: Prop 13 limits property taxes by capping them at 1% of the property's assessed value (the value at the time it was purchased). It also restricts how much the assessed value can increase each year. The increase is tied to inflation, with a maximum annual increase of 2%.

Limits on Reassessment: Prop 13 prevents reassessing the property's value to market value unless:

- There's a change in ownership (like selling the property), or

- Significant new construction is completed on the property.

Prop 13 aims to provide stability and predictability in property taxes by using the purchase price as the basis for assessment and limiting how much taxes can increase annually.

Proposition 19 limits the tax benefits of Proposition 13 by requiring inherited homes to be reassessed at market value if they are not used as primary residences.

Transferring property:

Proposition 19 limits the ability to transfer a parent's Proposition 13 taxes and tax base to their children or grandchildren.

Replacement home transfers:

Proposition 19 allows eligible homeowners to transfer the taxable value of their primary residence to a replacement primary residence.

Proposition 19 was passed by California voters in November 2020 and went into effect on February 16, 2021. It modifies Proposition 13 (on June 6, 197).

Parent-Child Transfer

When you choose to co-own your home and add your children to the title, they become joint owners of the property alongside you. However, this decision can lead to several significant challenges:

1. Tax Implications: Placing your home in joint tenancy with your child or children is considered a taxable gift under IRS regulations. If the value of the interest transferred to each child exceeds $17,000 (as of 2023), you must file a gift tax return for the year of transfer.

2. Legal and Financial Risks: Co-ownership exposes your home to potential risks associated with your child’s circumstances. If your child faces lawsuits, divorce proceedings, or tax liens in the future, creditors could potentially claim a share of the property. In some jurisdictions, this could lead to foreclosure to satisfy debts against your child’s ownership.

3. Capital Gains and Tax Efficiency: When selling the home, you can only apply the primary residence capital gains exclusion to your own share of ownership. This means that upon sale, each child could incur a long-term capital gains tax on their portion, which could have been avoided if the property had been transferred to them upon your death through a revocable trust. Transfers at death generally provide a step-up in cost basis, reducing potential capital gains taxes upon sale.

4. Property Tax Considerations: Adding a child as a co-owner or gifting (taxable gift) the property may trigger a reassessment of your property taxes. Recent legislative changes, such as California's Proposition 19, restrict exemptions from property tax reassessment on transfers of primary residences between parents and children. Now, such transfers may avoid reassessment if the child lives in the primary residence and timely files a Parent/Child exclusion form and a Homeowner’s Exemption.

*We are providing this information as a free client service and we make no warranties or representations as to its accuracy. We strongly recommend that consumers obtain guidance and advice from attorneys specializing in Real Property Tax and/or qualified Real Property Tax professionals.