Estate Planning Considerations under Proposition 19
Proposition 19 introduced major changes to California’s property tax rules that relate to estate planning.
If you plan to transfer real estate to your children or other heirs, it’s crucial to understand how these rules may affect your plans. Whether updating your will, creating a trust, or considering how to transfer property to heirs, reevaluating estate plans may help avoid unexpected tax consequences.
An Overview of Proposition 19
Proposition 19 is a constitutional amendment that was approved by California voters in the November 2020 election and took effect in February 2021. It modified property tax rules in two main ways.
Property Tax Transfer
Proposition 19 allows homeowners aged 55 and older, people with severe disabilities, and victims of wildfires or natural disasters to transfer their property tax base to a new home in California. This benefit was previously limited to a few counties. The transfer can be done up to three times in a lifetime and is applicable even if the new home is more expensive than the original, although partial adjustments to the tax base may apply.
Inheritance Rules for Property Tax
Under California’s Proposition 19, inheritance rules for property tax underwent significant changes, particularly concerning real estate transfer between parents and children. Before Proposition 19, parents could transfer their primary residence and up to $1 million in other property to their children without triggering a reassessment, allowing heirs to keep the original, lower property tax rates. Under the new rules, only primary residences are eligible for this exclusion, but the child must use the home as their primary residence to qualify. If the property’s market value exceeds the current tax-assessed value by more than $1 million, a partial reassessment will be conducted to increase the tax liability. Transferring other properties, such as vacation homes or rental units, is no longer exempt, leading to a reassessment of market value upon inheritance.
What Changed Under Prop 19?
Prior to Proposition 19, Proposition 58 allowed parents to transfer a primary residence to their children without causing a reassessment of the home’s property tax base. This allowed families to keep a lower property tax rate based on the property’s original purchase price. Up to $1 million of other real property, such as vacation homes, rental properties, or commercial properties, could also be passed down without reassessment. Proposition 19 narrows these exemptions. The only properties that can avoid reassessment when transferred to heirs are primary residences, and even then, only under specific conditions.
Primary Residence Transfers
Under Proposition 19, if a parent transfers a primary residence to a child, the child must use that home as their primary residence to avoid reassessment. If the child does not live in the house as their primary residence, the home will be reassessed at current market value for property tax purposes. This can significantly increase the annual property taxes.
Value Limits
Even if the child moves into the home and uses it as their primary residence, Proposition 19 may limit how much property tax relief they can receive. A partial reassessment will occur if the home’s current market value exceeds its assessed value by more than $1 million. The tax base can still increase in such cases, though by a smaller amount.
No Exemptions for Other Properties
Under Proposition 58, parents could transfer other properties (such as vacation homes or rental properties) valued at up to $1 million to their children without triggering a property tax reassessment. Proposition 19 eliminates this benefit. All non-primary residence properties will be reassessed to determine market value upon transfer to heirs.
Effect on Estate Planning
Proposition 19 brought new tax rules regarding the inheritance of property that can negatively impact families with valuable real estate. The elimination of tax breaks for non-primary residences, such as vacation homes, rental properties, or investment properties, has led to substantial tax increases for heirs who find themselves facing reassessment at current market value.
The changes brought by Proposition 19 make it essential to review and adjust your estate plan. One way to avoid the impact of Proposition 19 is by gifting property to your heirs during your lifetime. However, this approach may lead to gift and capital gains taxes and should be carefully considered by consulting with an estate planning attorney. Trusts provide another estate planning option. An irrevocable trust may offer a solution by placing properties in a trust that will reduce future tax liabilities. An estate planning attorney can advise whether this is an appropriate approach for your situation. A buy-sell agreement is an option sometimes used by families with significant real estate holdings, particularly commercial or investment properties, to plan for the transfer of ownership. Buy-sell agreements can be an effective strategy to provide liquidity and prevent heirs from being forced to sell properties to cover increased property taxes. Building cash reserves can also help heirs pay increased taxes after reassessment.It is important to have an open conversation with your heirs about your estate plan and how Proposition 19 might impact their inheritance. They should understand the potential tax consequences of inheriting property under the new rules and have a plan to manage them.
Ensure a Smooth Property Transfer to Your Heirs. Navigate Prop 19 with Confidence
If you’re concerned about how California’s Proposition 19 will affect your estate plan, property inheritance, or family’s financial future, The Singh Law Firm is here to help. Our experienced estate planning attorneys work to guide families through complex property tax laws. Whether you’re passing down a family home, managing investment properties, or looking to minimize tax burdens, we can craft a strategy that protects your assets and legacy. Contact us at 510-901-5375 in Silicon Valley or 818-658-2174 in Los Angeles to schedule a free consultation today.
