California homes are valued at high prices these days, and frankly most of these properties do seem to retain their high value, in comparison to lower-priced homes in many other states, for example in the Midwest, in the Deep South… way up north in New England, Vermont, Maine and New Hampshire, where families can purchase a multi-bedroom home on an acre or two of land in a decent neighborhood for a very reasonable price, at low 6-figures.
Proposition 13 and the Statewide CA Property Tax Rate Cap
Even so, many California homes now have a “taxable value” that is lower than the average American market value (i.e., in other states). However, these values are deceptive as this is only due to Proposition 13 being voted into law in 1978, holding back the taxable value of property from going up higher than 2% per year, regardless of the increase in the overall average American market value; until, that is, property changes ownership.
Proposition 13 cut the statewide property tax rate to 1% of a home’s taxable value, down from a statewide average of 2.67% to 3%, give or take. Of course, what many Californians don’t realize is that this tax relief for homeowners also holds rental prices down, as apt. building owners, landlords, are spending less on property taxes themselves, therefore are less inclined to go up in rents.
As many of us know, property values were increasing in the early to mid 1970s in California, and business property owners as well as homeowners were suddenly victims of consistent property tax hikes, and artificially escalated property values, when until then you could buy a lovely middle class property at a very affordable rate – almost anywhere in the state, other than certain obvious high-end enclaves, such as Santa Cruz, Santa Barbara, Sausalito, Beverly Hills, Malibu, etc.
Public Push-Back Against Property Tax Hikes
Residents like retirees, middle class widows, veterans and elderly folks with fixed incomes, were basically living on government pensions or social security and perhaps a few stock dividends kicking in here and there. The problem was, from a Californian public relations point of view – folks living on these modest fixed incomes were all of a sudden losing their home to egregious property tax hikes… And public anger was rising to a fever pitch by 1976, 1977.
By 1978 this dissatisfaction among middle class and upper middle class families – against artificially escalated, unpredictable property tax hikes rose to such a fever pitch throughout California that property tax relief, in the form of Proposition 13, was an inevitable outcome. Largely due to the efforts of wealthy apt. building landlord Howard Jarvis and his “Taxpayers’ Revolt” – and this put a stop to homeowners hemorrhaging cash every year on property taxes.
Prior to Proposition13 the state was growing in leaps and bounds, becoming more affluent by the decade; therefore large homes and business properties were being purchased by the middle and upper middle classes – and inherited from parents – which subsequently triggered a “change in ownership” and thus property reassessment.
Therefore the resulting property taxes were high enough to be called estate taxes, and often caused middle class families to sell their home, as they simply could not afford this type of property taxation any longer. Put quite simply – it was unsustainable. Which is precisely why Howard Jarvis and Proposition 13, and later the ability to transfer CA property between siblings, came about in the first place.
Proposition 58 and the CA Parent-Child Exclusion are Born
By the 1890s property owners in the state were getting used to property tax relief, and wanted more. So in 1986 the California Legislature voted with a huge majority to place a measure on the ballot called Proposition 58, to exclude parent-child transfers of property from the legal definition of “change of ownership.” And the right to transfer CA property between siblings, along with parent-to-child exclusion, was born… adding to the popular suite of tax relief benefits furnished by Prop13.
This tax measure (which has completely morphed into Proposition 19, with additional tax breaks), used in conjunction with a loan to an irrevocable trust, made the right to transfer CA property between siblings, also called “a sibling-to-sibling property transfer”, possible – so beneficiaries looking to buyout inherited property shares from co-beneficiaries could easily do so, while establishing a low property tax base, when inheriting a home from parents… when inheriting property taxes.
Heirs were now able to transfer parents property taxes, to transfer CA property between siblings (through a trust loan) and keep parents property taxes from a now standard property tax transfer – which attorneys call a Parent to Child Property Tax Transfer… plus for the first time the right to avoid property tax reassessment during an inheritance – and this was actually normalized. Which was incredibly important to middle class homeowners all across the state of California, who were previously struggling to make it every year, with heightened property taxes always looming over their heads. This was causing a growing state of anxiety, county by county.
This also meant that when homes and small business properties were inherited the property tax bill would not be affected. Proposition 58 was approved by more than 75% of voters statewide. In fact voters soon thereafter passed Proposition 193 to extend the same rules to transfers between grandparents and grandchildren, as long as the children’s parents were deceased.
Of course, as with everything else, certain malcontents (the realtor community among them), simply couldn’t stand to see that many people benefiting from a good thing, and so decided to unravel it, get more property tax revenue into the state coffers, as well as increase real estate sales commissions!
California Realtors Finally Deal a Blow to Property Tax Relief
In 2020, backed largely by the powerful California realtor community, with the CA Legislature stepping in to provide political cover, “Proposition 19” was created to take a large slice of that tax relief back from homeowners – yet appealed strongly to homeowners over 55, the elderly, folks with infirmities, and victims of natural disasters, fires and earthquakes, all who benefited nicely from a host of attractive property tax relief benefits!
Although, many voters (now experiencing buyer’s remorse) did not fully realize that Proposition 19 took away some of the protections afforded by Propositions 58 and Prop 193, and replaced them with a more limited exclusion from property tax reassessment. Many middle class and upper middle class Californians who have worked all their lives to own a home to pass down to their children are finding that their plans have been upended by Proposition 19. Due to the increase in property values, reassessment of inherited properties to current market value will force some homeowners to sell because they can’t afford to pay the higher tax bill every year.
Which is exactly why the spirit of Howard Jarvis reared up its’ head again, in the form of the Howard Jarvis Taxpayers Association organizing volunteers to collect signatures to try to repeal the “death tax” portion of Proposition 19, without changing the provisions that protect seniors and wildfire victims. To qualify the measure for the November 2022 ballot, nearly a million valid signatures of registered voters are needed. Deadline to submit signatures is 4/29/22.
Once again the middle and upper middle classes, along with the elderly, have powerful allies in California!
Taxpayer’s Association Summation of Efforts to Protect Tax Relief:
“Early organizing will be essential if the effort to repeal the death tax is to succeed. The Howard Jarvis Taxpayers Association (HJTA) is shifting into high gear, with all hands on deck, signing up volunteers and spreading the word at https://reinstate58.hjta.org/#volunteer The Taxpayers Association is sponsoring a Bill entitled “Senate Bill 668”, introduced by Sen. Patricia Bates (of Laguna Niguel) – which would, if passed, continue to protect your grown children, and theirs, against tax hikes should they inherit your home, which attorneys have a fancy name for – i.e., “intergenerational transfers of property” (up to Feb 16, 2023).
Proposition 19’s changes to the tax treatment of inherited property took effect in February, leaving Californians little time to consult with family members, attorneys or tax professionals to plan for these sudden, harsh changes to property tax liability for the next generation.
HJTA also supports a constitutional amendment to reinstate Proposition 58 (1986) and Proposition 193 (1996), two measures that were overwhelmingly approved by voters to protect family property from reassessment when passed from parents to children or grandparents to grandchildren. Assemblyman Kevin Kiley (Granite Bay) is working with HJTA on final language for an Assembly Constitutional Amendment that would restore these protections.
California voters have strongly opposed state inheritance taxes, which were abolished by constitutional amendment in 1982. Proposition 19 has effectively resurrected the inheritance tax in California, with the added burden that families must pay it every year as a condition of keeping their property.”
And once again the middle and the upper middle classes plus the elderly in California have powerful friends and allies stepping up into the spotlight to protect their homes, their security and their well being!