Money Matters

California Prop 19 Planning

17 Dec 2020 by: Matt Showley  ,

Californians voted in the November 2020 election to pass Proposition 19 which adds and strips exemptions to property tax rules, giving more breaks to seniors, disabled, and wildfire victims when they move, while taking exemptions away from people who turn inheritances into investment property.  Prop 19 will impact many California families in ways that were not fully understood during the election cycle. 

The Good News

Prop 19 primarily focused on increasing flexibility for seniors wishing to sell their home to relocate within California and raised tax revenue to support firefighting efforts around the state.  The measure allows homeowners to sell their home and buy a home of equal or lesser value and keep their original property tax base, or to buy a home of greater value and carry their property tax base over to the new home, plus the additional value of the new home being added to the tax base.  For people age 55 and older or disabled, the property tax base transfer can take place up to three times if you reside anywhere in California. 

The Bad News

There are other provisions that will significantly impact those who own multiple homes or rental property in California.  Before Prop 19, parents could transfer their primary residence and $1 million of other property to their children without having the property tax base reassessed.  Prop 19 will remove the Parent to Child/Grandchild exclusion for the transfer of property tax base upon inheritance or gift of a non-primary residence.  In other words, unless the recipient of the property occupies the property as their primary residence, the tax base will be reassessed to fair market value.  This will effectively re-assess the property tax base and erode the parent/child exclusion over the next 20-30 years as more properties are transferred to the next generation and will raise hundreds of millions of dollars in tax revenue for the state.

There will remain a $1 million exemption from the parent/child exclusion that allows property to pass to heirs with a maximum of $1 million of value that will not be re-assessed, as long as it continues to be used as the heirs’ principal residence.  For example, if a home has a property tax base of $250,000 and is currently worth $1.5 million, it will pass to heirs with a new tax base of $500,000 if the heirs use it as their primary residence.  The calculation includes the current tax base of $250,000, plus the $250,000 of net new assessed value that results from subtracting the current $250,000 tax base and the $1 million exemption from the current market value of $1,500,000 ($250,000 + ($1,500,000-$1,000,000-$250,000) = $500,000).  If the estate also owned another property (second home or rental property), that property would be reassessed at fair market value for tax purposes.

If property is left to heirs and does not become the heirs’ primary residence, the tax base will be re-assessed at full market value.

Planning Opportunity

For owners of rental property or a second home, there is a window of time between now and February 16, 2021 where you might consider gifting property to children and preserve the current tax base if it is very low.  Practically speaking, this gift must be made by January 15th in order to be recorded in time for the February 16th deadline.  This could be beneficial if you do not need the income from a certain property and your heirs plan to retain it as an investment or a second home.  This also could make sense if a property is operating at a loss and has a low tax base.

Each family should evaluate their options on a case-by-case basis.  This is very short notice, and there are many considerations as you navigate Prop 19’s impact so we suggest discussing your options with CCMI and also with your estate planning attorney.  Any gifts made before the deadline will have estate tax implications.  The rules are quite confusing and there are pros and cons to each option that you might pursue.  The key thing is to know that there is a short window of time where it might make sense to take action and we want to make sure that you are aware of it before it passes.

If you are looking for additional resources on Prop 19 rules, please click here.

CCMI provides personalized fee-only financial planning and investment management services to business owners, professionals, individuals and families in San Diego and throughout the country. CCMI has a team of CERTIFIED FINANCIAL PLANNERTM professionals who act as fiduciaries, which means our clients’ interests always come first.
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Matt Showley is a CERTIFIED FINANCIAL PLANNER™ professional and Accredited Estate Planner®️ who advises individuals, families, and business owners on portfolio management, financial planning, tax and estate planning, real estate, cash-flow modeling, and education planning. In addition to his role as principal and owner, Matt continues to oversee the firm’s operations and work with new and existing clients. Matt joined CCMI in 2006 and has contributed significantly to the firm’s wealth management and financial planning processes and client relationships.

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