Proposition 19 will go into effect February 16, 2021, and due to the substantial impact California Proposition 19 will have on your property taxes, we are publishing this newsletter to provide you a summary of the major effects of Proposition 19.
Effect of Proposition 19 on Homeowners
Proposition 19 will adversely affect CA real property owners in the following ways:
1. Ability to transfer a primary residence between parent and child without reassessment will ONLY apply if 2 conditions are met:
(i) The primary residence being transferred must also become the recipient’s primary residence; and
(ii) The fair market value of the primary residence being transferred at the time of transfer CANNOT exceed the transferor’s taxable value by more than $1 million (beginning February 16, 2023, and every year thereafter, the $1 million limit will be adjusted for inflation to reflect the percentage change in the House Price Index for CA for the prior calendar year).
What does this mean? This means that if at the time of transfer, the difference between the transferor’s taxable value and the fair market value exceeds $1 million, the new assessed value will be the fair market value less $1 million, AND if the primary residence being transferred does NOT become the recipient’s primary residence, then the property will be reassessed to its fair market value.
The first condition will pose a major challenge for parents with several children, as the primary residence being transferred must become the primary residence of ALL the children receiving the real property.
2. $1 Million Exclusion for commercial, rental and vacation property will be completely ELIMINATED
The ability to transfer $ 1million of assessed value of other property (property that is NOT one’s primary residence, i.e., commercial, rental, vacation properties) will be completely eliminated.
Parent owns a home that is his primary residence and also owns a commercial property. The home has a taxable value of $500,000 and a fair market value of $3 million. The commercial property has a taxable value of $500,000 and a fair market value of $1 million. Parent wants to transfer both properties to his daughter.
Assuming a property tax rate of 1.25%, the combined annual property tax of both properties is $12,500 (taxable value of $500,000 for the home + taxable value of $500,000 for the commercial property = $1 million. Then, 1.25% tax rate x $1 million = $12,500.)
Result BEFORE Proposition 19
No reassessment on the transfer of either the primary residence or the commercial property. WHY? Because before Proposition 19, parents could transfer their primary residence to their children without triggering reassessment of property taxes, regardless of the property’s value and because before Proposition 19, parents could transfer up to $ 1million of assessed value of property other than the primary residence (i.e., commercial property) to their children and the children would retain their parents’ assessed value.
END RESULT: The combined annual property tax will remain $12,500.
Result AFTER Proposition 19
There will be an adjustment to the assessed value of the home and a full reassessment on the rental property. WHY? Because the difference between the fair market value ($3 million) and the transferor’s taxable value ($500,000) exceeds $1 million.
Therefore, the new assessed value of the primary residence will be the fair market value ($3 million) less $1 million = $2 million.
What about the commercial property? The commercial property will be fully reassessed, because Proposition 19 completely ELIMINATES the $1 million exclusion for properties other than the primary residence. Therefore, in this case, the new taxable value for the commercial property will be its fair market value ($1 million).
The new combined annual tax property will be $37,500 ($2 million of new taxable value for the home + $1 million of new taxable value for the commercial property = $3 million. Then, 1.25% x $3 million = $37,500).
END RESULT: The combined annual property tax will be $37,500.
A formula like the ones below will likely be used by assessors to calculate the “new taxable value:”
Taxable value = property tax value (this can be found on your most recent property tax bill)
Assessed value = fair market value
New taxable value = “taxable value” + $0 (if the assessed value upon the transfer is less than the taxable value plus $1 million)
New taxable value = “taxable value” + [assessed value upon the transfer – taxable value – minus $1 million] (if the assessed value upon the transfer is equal to or more than the taxable value plus $1 million).
Because of this substantial impact of Proposition 19, you may want to consider transferring your CA real property to your children and/or grandchildren before February 15, 2021, to avoid reassessment of your property taxes.
Proposition 19 provides taxpayers with a very small window to react to these changes; therefore, we highly recommend contacting our law firm as soon as possible to better discuss how Proposition 19 will affect you specifically. We are currently offering a free 15min Zoom consultation to discuss your estate planning needs. Please contact us at (619) 399-7700 or Sole@WebbLawGroup.com to schedule your meeting.
There are several other effects and concerns you need to be aware of before you make a transfer of your CA real properties. The information provided in this newsletter does not, and is not intended to, constitute legal advice. You can reach out to one of our experienced estate planning attorneys to obtain advice with respect to Proposition 19 and how it applies to your specific situation.