Planning for California’s Proposition 19

Everyone had eyes at the top of the ticket on November 3. But other elections also had a significant impact on people’s lives. In California, voters had many propositions, including Proposition 19. As of November 9, 2020, Proposition 19 was headed to passage by a margin of 51.2% to 48.8% with 84% of the vote counted.

Proposition 19 is a ballot measure in California to modify Propositions 13 and 58. Proposition 13 passed in 1978. Proposition 13 limited property tax increases to 2% annually unless reassessed due to sale or other transfer. As a result, many properties in California have a property tax assessment far lower than the current fair market value. Proposition 58, passed in 1986, allowed a property owner to pass along their primary residence (and up to $1 million in assessed valuation of other property) to their children at their preferential property tax assessment. (This was expanded by later proposition to qualifying grandchildren.) California law also allowed an eligible homeowner (over age 55, severely disabled, or the victim of a natural disaster) to move once to a participating county in the state and bring their assessed valuation with them if they were moving to a home of lesser value.

Proposition 19 modifies the existing law ushered in by Propositions 13 and 58. First, it allows eligible owners (over age 55, severely disabled, or the victim of a natural disaster) to move anywhere in the state up to three times to a home of lesser value and bring their property tax assessment with them. While that’s great for homeowners, Proposition 19 also modifies the law regarding inherited properties.

Prior to Proposition 19’s effective date, a property owner can leave their primary residence and up to $1 million in assessed value of other real estate to their children (and qualifying grandchildren) and the assessed value would transfer with the property. After Proposition 19, the preferential assessed value can only transfer if 1) it’s for the primary residence (and no other real estate), 2) only if the child (or qualifying grandchild) is going to use it as their primary residence, and 3) only to the extent the fair market value doesn’t exceed the assessed value by more than $1 million. So, after Proposition 19, the transfer of other property, such as rental property or commercial properties, would face reassessment to fair market value at the time of the transfer.

Let’s look at an example:

Mary owns her primary residence, currently worth $1 million, and with an assessed value of $300,000. She pays $3,600 per year in property taxes on her primary residence. If the property were reassessed at fair market value, the property taxes would be $12,000 per year. Mary also owns a rental property assessed at $250,000 and worth $1.2 million. Mary pays $3,000 per year in property taxes on the rental property, but if it were assessed at the fair market value, the property taxes would be $14,400. Mary has one child, Jason, to whom she will leave her properties.

Before the application of Proposition 19, Mary could leave both these properties to Jason and he’d continue to pay the same property taxes Mary would have. The property taxes would only increase up to 2% per year, just as they would with Mary. After the application of Proposition 19, if Mary transferred the rental property to Jason, it would be reassessed at fair market value and Jason’s property taxes would go from the $3,000 Mary would have paid to $14,400. Similarly, if Mary transferred her primary residence to Jason, it would be reassessed at fair market value and the property taxes would increase from $3,600 to $12,000 per year, unless Jason used it as his family home.

What can be done about this? Proposition 19 is effective for transfers after February 15, 2021. So, Mary could transfer the properties to Jason before that date and the old law would still apply. In other words, Jason would not face reassessment of the properties to their fair market value and he would not have to live in the residence as his family home.

Mary could transfer these properties to Jason outright. However, an outright transfer could make the properties vulnerable in the event of Jason’s divorce or other problems. A transfer to Jason in a trust could avoid many of these issues. However, any such transfer must be made by February 15, 2021. Any transfers after that date, whether outright or in trust, would be subject to the rules of Proposition 19. Of course, when Jason later transfers these properties again (after February 15, 2021) due to his death or other reasons, Proposition 19 would still apply and the properties would be reassessed at fair market value at that time unless the family home exception in Proposition 19 applied.

Will Proposition 19 have unwanted consequences for your family? Consider whether a transfer of your California realty by February 15, 2021, makes sense for you.

Stephen C. Hartnett, J.D., LL.M.
Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128
www.aaepa.com