Prop 19: Major Property Tax Law Change
By Tony J. Tyre, Esq.
Proposition 19 passed in the recent election by receiving approximately 51% of votes and will take effect in California on February 16, 2021.
Under current law (pre-Prop 19), there are great benefits for parents who want to transfer property to their children yet avoid property tax reassessment. For example, a married couple can pass property to their three children and avoid property reassessment, when transferring (1) their personal residence and (2) other properties with a combined assessed value of one million dollars per person.
For example, if Dad and Mom bought a house in 1980 for $200,000, and two rental properties later for $300,000 and $600,000, Dad and Mom could likely transfer all property to Son and to Daughter without property tax reassessment, regardless of the current market value of all properties.
Prop 19 changes that rule by allowing people age 55 and older, disabled people, and wildfire victims to keep their property tax basis when moving. Further, Prop 19 changes the parent-to-child exclusion in our previous example to only apply to Dad and Mom’s personal residence if Son or Daughter actually moves into the home.
As a result, many people are now considering transferring property to children before Prop 19 takes effect. The benefit of transferring now is that children have the opportunity to receive more property while keeping the parents’ property tax basis.
However, the largest negative of transferring property now is losing an income tax benefit to receiving property through inheritance called “step up in basis.” Put simply, inheriting property often allows the recipient to avoid paying capital gains income tax. Other negatives of transferring property now are losing control of the property (the property is no longer Dad or Mom’s property), liability consideration of the person who owns the property (what if Son causes a car accident?), and the necessity of filing a gift tax return.
In summary, Prop 19 has significantly changed property tax rules in California. For additional information, please speak with your legal or tax advisor.