California Proposition 19: Property Tax Changes and Inheritance
California’s newly passed Proposition 19 will likely have major tax consequences for individuals inheriting property from their parents.
Proposition 19 was approved by California voters in the November 2020 election, and will result in significant changes to the property tax benefits Californians enjoyed previously under the 1978 Proposition 13 law in effect previously.
Previously, Californian’s who inherited property from their parents enjoyed two tax benefits. The first benefit, which is unaffected by Proposition 19 is what is call a “step-up in basis”. The step-up in basis is especially important for anyone selling property. If an individual purchases a home for 100k and sells it for 500k, then capital gains taxes will be owed on the 400k increase in value since the purchase of the home. Capital gains taxes are based on the growth in value of the asset. In the above example, that growth was 400k. The advantage to inheriting property from parents is that the original purchase price (100k in the above example) is increased to reflect the current market value on the death of the homeowner. Therefore, the step-up in basis increases the value to the date of death value for the children who inherit property. If a child were to sell the above property after inheriting it and receiving a step-up in basis, then there would be no capital gains taxes unless it sells for more than 500k. Great for anyone who inherits and decides to sell. But what about those who inherit property and want to keep it?
For those individuals who decide to keep inherited property as opposed to selling right away, Proposition 19 will impact the second potential tax benefit, which is how your annual property tax is calculated. This second benefit was previously available for any property inherited from parents up to 1 million dollars, or their primary residence of any value. Property taxes due on a property are based on its assessed value. When a property is sold, the taxes are increased based on the assessed value. A property that is owned for years is not reassessed unless there is a change in ownership. Therefore, a property purchased at 100k as in the above example will continue to have its property taxes charged based on that value. Prior to Proposition 19, parents could transfer property to their children without triggering a reassessment. This would allow the children to enjoy the same property tax basis that their parents paid. Proposition 19 has changed the availability of the exclusion and limited the amount that may be excluded.
Post February 16, 2021, California Proposition 19 is now in effect. From now on, parent-to-child exclusions for reassessment has been limited to only the primary residence. The primary residence must be primary for the parents as well as the child who inherits, with a one-year window for a child to move into the property after inheriting. On top of that, this much narrower exclusion is limited to 1 million dollars. For example, a primary residence that is transferred to a child with a basis value of 100k that has a current value of 1.5 million, will still require property tax basis to be increased to 400k (1.5 million – 100k basis – 1 million cap). Again, this exclusion is only available if the parents live in the house and transfer to a child who then lives in the house within one year. For any property which is not a primary residence, it will now be reassessed, and the property taxes increased.
Generally, this means that anyone who has owned property for a significant period of time and expects to pass it to their children will have to consider that their children may have to pay property tax based on the assessed fair market value of the home. This will significantly affect whether the child decides to sell the property or keep it, and in some circumstances, require the sale of the property if the child does not have the resources to pay the adjusted tax rate. For property that has been owned by a family for decades, and sometimes generations, this may create a great impact and an upturn in the amount of sales in the future. However, every situation is different, and you should always contact your attorney to determine what options are best for you.
