With the passing of Proposition 19 in November, many Californians are looking ahead at how this property tax measure will change the way residents can inherit property: and what this may mean for their estate plan. Read on for Evolution Tax and Legal’s breakdown of Prop 19- and how it may affect you.
What is Prop 19?
Proposition 19 is a property tax measure that is radically changing the way Californians inherit property. Prop 19 stems from the property tax protections put in place by the 1978 passing of Prop 13, which caps property taxes at 1% of a home’s assessed value, based on the year, and prevents drastic rises in property taxes, even if the home’s value increases at a high rate. Previously, inheriting property meant inheriting the same property tax basis the former owner had in that home – that is, children inheriting property from their parents wouldn’t see an increase in their property taxes. In addition, this meant that the inheriting children could use the home in any way (e.g. as a rental or income property) while keeping the property tax rate locked in.
Under Prop 19, beginning on February 16, children will see an increase in property taxes upon inheriting real property from a parent. The child will factor this increase into their decision to keep or sell the home. If they choose to keep the home and use it as their primary residence, up to $1 million of the reassessed value will be excluded from the new tax basis. If they choose to keep the property as anything other than their primary residence, a vacation home, or rental home, there will be no exclusion from the reassessed value, and the property taxes will increase based on the fair market value at the date of transfer.
While reducing the tax breaks for children inheriting homes in California, Prop 19 oppositely extends additional property tax protection(s) to qualifying California residents.
Beginning on April 1, 2021, Proposition 19 extends these protections to those residents aged 55+, those with severe disabilities, and those who have lost their home to natural disasters in the state of California. Prop 19 provides these qualifying residents with the same property tax protection they have been receiving under Prop 13 and now extends the protections to the purchase of a new home.
Proposition 19 eases the tax burden by allowing members of the senior community, those with severe disabilities, and residents who’ve lost their home to natural disasters to purchase a new home and blend the price of the new home with the property tax base of their old home, thereby decreasing the reassessed property tax value. In the past, members of these groups could move once, to a new home of equal or lesser value within their county, and receive the tax break benefits. Under Prop 19, they can now move up to 3 times, within any area of the state, to a home of any value and continue receiving these property tax protections.
For example, a resident of the qualifying groups could live in a home with a taxable value of $400,000 and a market value of $1,200,000. Under Prop 13, they are currently paying $4,400 in property taxes annually. If the homeowner purchases a house worth $1,400,000, they will be required to pay $6,600 annually in property taxes, under Prop 19. Without the passage of Prop 19, those same homeowners would be paying $15,400 in annual property taxes.
Homeowners of qualifying groups who have hopes of moving to a new home or new area will be reaping the benefits of Prop 19 in the years to come, while those hoping to inherit a home along with the tax benefits of their parents will be making tough decisions in regards to keeping or selling their relatives’ home.
What Do the Changes Mean for my Estate Plan?
The changes to rules regarding property inheritance might mean making some changes to your estate plan. The primary residence requirement of Prop 19 can make inheriting a home difficult, especially for multiple adult children and children with families. There are options to ensure your children can reap the benefits of your home as an inheritance.
One such option would be putting your home in a revocable trust, which allows your children to evenly divide up assets when the time comes- including the home. So long as one child would move into the home as their principal residence, while the others inherit assets of equal values, this allows the maintenance of the property tax value as passed on from the parents.
Secondarily, if you would like to take advantage of the current California property tax law and exemptions, which does not require the transferee to live in eh home as their principal residence and does not put a value limitation on reassessment, you can think about making a current transfer to an irrevocable trust. This strategy, of course, will have to be completed prior to the February 15, 2021 effective date of Prop 19.
There are various ways to pass property along while maintaining the property tax basis as is currently held. Please contact our office should you want to discuss these alternative strategies.
Who will be Impacted by Prop 19?
Prop 19 will impact many, in both a positive and negative way. Children who are inheriting homes from their parents that have been traditionally protected from property tax hikes will now be negatively impacted, especially if the children were hoping to hold the property as a second home or a rental property.
However, members of the senior community, anyone 55 and older, as well as anyone with severe disabilities or anyone who has lost their home to a natural disaster will be positively impacted, as they are continually protected from a jump in taxes, for up to 3 moves, into a home of any value and in any area of California.
How Will Prop 19 Impact Property Taxes?
While tax breaks are extended for some, California residents who are inheriting homes will likely see an increase in property taxes. This change now makes one of the more expensive states to live in to become even more unaffordable. Experts are predicting that blue-collar workers will continue moving to more affordable areas of the state, and young adults will delay buying homes in the area due to the increase in taxes and increased cost of living.
What Happens if I Fail to Comply with the New Prop 19?
Really, there is no way to avoid compliance with the new property tax assessment protocols under Prop 19. Upon a transfer of property, a deed is recorded with the local county recorder’s office that signifies them to reassess the value, should the transfer not qualify for an exemption under the new Prop 19.
It is at this time that you notify the local county recorder of your or your transferee’s eligibility for the property tax assessment exemptions under Prop 19. Once the property is reassessed by the local county recorder’s office, they will provide you with a notice of reassessment (if any) and an updated/supplemental property tax bill for the year (once again, if any).
Should you not agree with the reassessment or think the property tax assessor did not provide you with the Prop 19 exemption you are otherwise entitled to, it is possible to contest the reassessment with the local county recorder’s office. However, there is a strict administrative process to have these assessments challenged, and if not followed, will not allow you to overturn the property tax assessors determination.
This is all to say – do not take this challenge into your own hands. Should you not know the correct administrative procedure to follow, you will likely lose this challenge.
Furthermore, if you do not win, or you obtain a reassessment that is not favorable to you, make sure to still pay your property tax bills. If you don’t pay your property taxes, you could eventually lose your home through a tax sale. This, however, cannot happen until five years after the property is ‘tax-defaulted’ (e.g. failure to pay property taxes on time).
Luckily, there are no criminal tax implications for the failure to pay local property taxes in California, but it will more than likely result in the loss of your home.
Consult a California Tax Attorney
Proposition 19 is a complicated measure, and if your estate plan involves leaving a home to your children, it may be time to consider your options and consult an experienced tax attorney. At Evolution Tax and Legal, we have a team of professionals, both CPAs and lawyers, prepared to work with you to build an estate plan that makes sense for you and for your children.