Proposition 19: What You Need to Know About Property Taxes in 2021
Property taxes have been a huge issue in California ever since the passage of Proposition 13 in 1978. That’s because many people who continue to own their homes have a lower property tax than new purchasers. The most a homeowner’s tax can increase is 2% per year for as long as you continue to own your home, unless you make certain improvements. If the home is sold or transferred to a third party, the property tax will be reassessed based on current fair market value.
One exception to this reassessment has been transfers from parents to children or grandchildren. Under current law, a transfer of a personal residence of any value to a child or grandchild is exempt from reassessment. In addition, a transfer between parent and child or grandchild of other property, like a vacation or rental home, is excluded, subject to a limitation of $1 million.
How the law is changing.
Proposition 19, which takes effect on February 16, 2021, will make the following changes.
- Personal residences- the child will only qualify for the exclusion if they make the property their principal residence, and the exclusion is limited to the first $1 million of value. Any excess in value will be reassessed.
- Other property- the exclusion for all other property will be repealed, and the property will be reassessed upon transfer.
- Grandparent/grandchild exclusion- this will now only be available if nobody in the intervening generation survives.
This creates an opportunity to take advantage of current law before it expires next month. One downside to giving a home or property to a child or grandchild is they will take your current cost basis and would not be able to benefit from the step-up in basis that has historically occurred whenever property is inherited from a decedent. To solve that, a very enterprising local estate planning attorney has created a “defective trust” that allows the parent to gift the home to the trust while continuing to live in and control the house. The transfer would preserve the current law’s exclusion, and the home would qualify for the step-up in basis at the death of the parent. Even better, should the trust later be voided by a change in state law, the trust can self-destruct and the property can revert back to the parent. If you are interested in using a device like this for your own family, please let us know immediately (trust must be in place prior to February 16).
Age 55+ Sales of Principal Residence
A huge new tax break has opened up for older Californians who want to sell their home and move to another location in the state. Under current law, you are only allowed to take your current property tax assessment with you if you purchase a replacement home of equal or lesser value, and that only works if you exchange within the same county or a small handful of other counties in the state. Prop 19 breaks those restrictions wide open. After February 16, 2021, a homeowner, aged 55 or older, is permitted to transfer their current property tax assessment anywhere else in the state, and the replacement property can be worth any amount, even more than the home you are replacing. Any excess in value of the replacement property over the original property will be added to the original assessed value from the original home.
This will be a boon for those living in higher-cost areas of the state, like the Bay Area, who may want to move to less expensive areas, or move closer to children and grandchildren! If you want to take advantage of this new rule, be sure to wait until it has taken effect. There is some talk that implementation could be delay