The Impact of the New Proposition 19 on the Sale of Real Estate Properties
The Impact of Proposition 19 voted on November 3, 2020, is twofold: 1.) it modifies the rules pertaining to the transfer of property tax amount of real estate properties between parents and children or (and under some circumstances to their grandchildren, 2.) it provides property tax relief to a select group of people.
Proposition 19 and Property Tax Transfers
Under the current property tax law, parents can transfer to their children (and under some circumstances to their grandchildren) their primary residence, worth any amount, AND a property worth $1 million of assessed value without triggering a reassessment of the property for property tax purposes. As a result, two parents could transfer their primary residence and another $2 million of assessed value of real property without triggering a property tax reassessment.
As of February 16, 2021, per the provisions of the new Proposition 19, children (or in some circumstance grandchildren) inheriting a real estate property from a parent will still be entitled to the same portion of the inherited real property but it will be subjected to a new taxation system .i.e. the elimination of parent-child and in some cases grandparent-grandchild exclusion from property tax reassessment unless the following two conditions are both fulfilled:
1.) The child or under some circumstances to the grandchildren MUST use the transferred property as their primary residence within one year of the property's transfer;
2.) The primary residence exclusion is limited to the first $1 million of assessed value of the property at the time of death or of the transfer by sale or gift.
The current exclusion from reassessment for a non-primary residence of real properties is eliminated. The deadline to transfer real properties without triggering the new reassessment rules under Proposition 19 is February 15, 2021.
Below is an example to better understand the new property taxation rule and why it could easily generate conflicts between family members:
Mom dies owning her principal residence that she bought many years ago that has a property tax of $4,000 per year and a current assessed value of $1 million. Mom also owns another property with a current assessed value of $1 million.
Child #1, receives Mom’s principal residence valued at $1 million and makes the property his/her principal residence. As a result, child # 1 will be allowed to keep Mom’s current property tax value for this property. Child #2, receives the other property also valued at $1million.
This would appear to be an equal distribution with each child or grandchild receiving a property with a value of $1 million. But if we assume that the property tax will increase 2% each year and that the property Child #2 is receiving will be reassessed generating a property tax based on 1.25%, then over the next ten years child or grandchild #1 will pay $776 in property taxes and Child #2 will pay $136,867 in property taxes.
Proposition 19 and Property tax break
As of April 1, 2021, Prop 19 allows real property owners over 55 years of age, severely disabled, or victims of wildfire or natural disaster to carry-over the assessed value of their existing primary residence to a newly-purchased or newly-constructed primary residence anywhere in California, avoiding the payment of higher property taxes.
This provides property tax relief to this select group of people, provided that the value of the replacement primary residence is of equal or lesser value than their original primary residence. Learn more.
Hope this helps. Please feel free to contact me should you have any questions.