February 23, 2021
A new California law could have a major impact on your family’s financial future. Proposition 19 recently went into effect. It drastically changes the financial impact of real estate transfers between parents and their children. California voters approved Prop 19 last November, and it’s now in effect.
To understand what this means for property owners and possible recipients of that property in the future, it’s important to understand what Prop 19 replaced. Previously, Californians were guided by Proposition 13. Enacted in the late 1970s, Prop 13 helped limit property taxes. The new law makes changes to property tax benefits. It could mean severe financial consequences for recipients of property transfers.
To help clear up some of the confusion I recently sat down with Angel Riley of Chauvel & Glatt. She’s a local attorney who specializes in estate planning and probate law. While Riley recommends anyone considering transferring property in the future sits down with an attorney or tax specialist to consider the ramifications, she was able to give some insight into the basics of what Prop 19 means for Californians.
Under the old law, Riley explained, a parent could transfer a primary residence to a child that was completely exempt from a property tax reassessment. Whether in terms of a gift or even after death. Until recently, with a parent-child transfer, it didn’t even matter what the market value or assessed value of the property was.
The old law also offered an exemption for parent-owned investment properties, or even in some cases, multiple investment properties. This meant even vacation properties, rentals and commercial properties had an exemption of up to $1 million assessed value for parent-child transfers.
In some cases, parents were able to transfer investment properties free of property tax reassessment to their children. It even worked for multiple investment properties, just as long as the combined assessed value stayed under $1 million.
The new law took away the $1 million assessed exemption for investment properties. If you’re considering transferring an investment property of any kind to your children moving forward, it’s going to be reassessed at full market value. This could mean a major financial blow to your dependents. With this in mind, it’s now extremely important for children who inherit property from their parents to factor in the increased property taxes when making a decision on whether to keep or sell the property.
Prop 19 also covers primary residences. Riley says now if a parent transfers a primary residence through gifting, selling, or after death to their child, the child has to live in the residence in order to receive any kind of property tax exemption. In other words, the transferred property now has to be your child’s primary residence, and that’s not all. Prop 19 also caps the exemption at $1 million market value. Under the old law, you used to be able to transfer the property with no cap. Riley gave this example:
If a child gets a $2 million home from their parent, they move in and receive a $1 million market value discount. At a minimum, they could be assessed the remaining $1 million. Because parents aren’t allowed to pass on their tax basis to their child, it means their child could now be responsible for significantly more than what their parents were paying when they bought the property decades ago.
In a situation where the child keeps the property, not as a primary residence but as a second home, vacation home, or even a rental property, there’s no $1 million exclusion. In this case, your child faces a significant increase in property taxes.
Because voters already passed Prop 19 and it’s in effect, it’s too late for Californians to prepare for the new law. Riley adds, however, it’s still possible we could see some federal tax changes coming in the future, especially with a new administration in the White House.
If you’re considering transferring your property to one of your children in the future, it’s important to make a plan for your heirs. Think about sitting down with an attorney to determine how much your property is worth, and what the implications of Prop 19 mean for your own individual situation.
Riley adds, the information she provided is basic information about Prop 19, but not necessarily legal advice. All families and situations do differ, so be sure and seek out some expert advice from a professional.
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