California Proposition 19, which appeared on the November 3, 2020 ballot, recently passed, and it may greatly affect your estate plan. It is a constitutional amendment that significantly limits the parent-child property tax exclusion allowing transfers of real property between parents and children without a reassessment of the property’s taxable value to its current fair market value. Proposition 19 becomes effective for transfers of real property made on or after February 16, 2021.
Current Law on Transfers of California Real Property between Parent-Children
To understand the effects of Proposition 19, it is important to first understand the current law relating to transfers of California real property between parents and children.
In the State of California, real property is reassessed at market value if it is sold or transferred, and the property taxes can sometimes increase dramatically as a result. However, if the sale or transfer is between a parent and child (or from grandparent to grandchild, under limited circumstances), the property will not be reassessed if certain conditions are met and the proper claim is timely filed. California law currently excludes parent-child transfers of real property from property tax reassessment under two exclusions:
- Principal residence exclusion: You can transfer your principal residence to your children, regardless of the market value of the property and whether the children subsequently use the property as a principal residence or for some other purpose (such as a rental or vacation property). The property will not be reassessed for property tax purposes after the transfer. Property taxes still will be calculated on your base year value instead of the current market value.
- $1 million lifetime other property exclusion: You also can transfer $1 million of assessed value (not fair market value) of any other real property, including vacation, rental, and business property, to your children without the property being reassessed for property tax purposes. As with the principal residence exclusion, the property taxes will continue to be calculated on your base year value instead of the current market value.
Proposition 19 effects on Transfers of California Real Property between Parent-Children
Proposition 19 repeals and drastically limits the existing parent-child exclusions. For transfers occurring on and after February 16, 2021, the parent-child exclusion will apply only in limited circumstances to the transfer of your principal residence (as well as certain farm property), as discussed in detail below. The $1 million lifetime other property exclusion provided under current law is completely eliminated.
Proposition 19 eliminates the parent-child (and Grandparent-Grandchild) exclusion from reassessment for real property other than a principal residence. You may still transfer a principal residence to a child; however, the child must use the residence as the child’s own principal residence following the transfer to be excluded from reassessment. Further, if the fair market value of the residence exceeds the assessed value by more than $1 million, then the property will be partially reassessed based on the excess amount (but not to full fair market value). In order to receive this property tax benefit under Proposition 19, the child must claim the homeowner’s exemption at the time of the transfer of the residence. If the claim is not filed at the time of the transfer, the child has one year from the date of transfer to file the claim for the homeowner’s exemption.
If the child does not use the property as the child’s principal residence or fails to timely file the homeowner’s exemption claim, the property will be reassessed at market value.
For more information on Proposition 19, please visit the California Board of Equalization website at https://www.boe.ca.gov/prop19/.
If you have any questions about Proposition 19 or wish to discuss any other estate planning matter, please contact our office at (415) 777-3300 to schedule a consultation.