And yet, until these changes to property tax relief are repealed, let’s be thankful at least that, going forward, beneficiaries inheriting property directly from parents will still be able to retain Proposition 58’s parent to child exclusion from property tax reassessment (at full or current market value), as long as those direct beneficiaries move into an inherited property as a primary residence, within 12-moinths after the passing of the parent leaving that property as a gift, a sale, or an inheritance.
This is a difficult matter to overcome without some careful planning… and this is certainly one component of Prop 19 that was, shall we say, “under-played”, or actually hidden from voters, prior to Nov. 2020. The prevailing thought is that this will perhaps be repealed in the near future once voters actually experience the reality of these changes to Proposition 58, whether they voted for change or not.
Yet, whether we like it or not, all of these revisions do unravel long-standing tax benefits protected by Proposition 58 concerning the parent to child exclusion as well as trust loan enabled sibling to sibling property transfer, buying out property inherited by siblings; or Proposition 193, with regards to the grandparent to grandchild exemption; passed overwhelmingly by voters in California in Nov. of 1986 and March 1996, respectively, allowing parents to transfer their property tax basis of a primary residence ) to their children; plus up to $1 million of assessed value of other property – namely $1million of the Proposition 13 values on rental properties or other investment properties passed to heirs, not based on fair market value; and effectively allowing far more than $1million of property value to transfer while retaining the lower tax bill.
Even though the California Legislature and California Association of Realtors may be more interested in funding unfunded local government pensions, footing the bill for a few school programs, and getting some more homes into the market for sale – it’s not in question to any reasonable person, without a financial or political axe to grind, that Proposition 13, Proposition 58 and Prop 193 have saved heirs thousands upon thousands of dollars every year, that they would have otherwise been spending needlessly on vastly over-priced property taxes.
Not to mention the truly excellent sibling to sibling property transfer benefit, buying out inherited sibling property – which is always Proposition 58 & trust loan enabled, to buyout property inherited by co-beneficiaries. Noted attorney Devin Lucas, one of the most knowledgeable proponents of Prop 13, Prop 58 and 193, and California property tax relief in general, which he summed up brilliantly in Oct. of 2020. Mr. Lucas offered some real-world examples to illustrate the practical importance of these tax breaks for families, as follows:
“Due to the tremendous benefits of Proposition 13, many long term owners continue to pay property taxes based upon their original purchase price (or price as determined when the proposition was enacted), with annual increases not to exceed two percent, regardless of current value. This can be especially beneficial in areas such as Newport Beach, Laguna Beach, Costa Mesa, Orange County and other coastal communities that have seen incredible growth in property values.
For example, assume a parent’s home in Newport Beach is currently worth $2,500,000. They purchased the home long ago for low a low six-figure amount and due to the enormous benefits of Proposition 13 are paying about $3,500 a year in property taxes. If the child were to purchase a home for $2,500,000 today, that would equate to a $25,000 annual property tax bill (assuming one percent, not including various municipal bonds and other taxes commonly found on property tax bills). Transferring the property tax basis of the parent’s home, and therefore that $3,500 a year bill, just saved this hypothetical child $21,500 a year in property taxes. $21,500 a year, for as long as they own the home.
Principal residences have no cap in value, all other property, such as investment properties or second homes, have a benefit cap of $1 million, in which case a mother / grandmother and father / grandfather can combine their exclusions for a limit of $2 million. If the property is worth more than said caps, then a new blended property tax basis will be configured by the county…”
Other property tax breaks, Propositions 60 and Prop 90 (allowing homeowners over the age of 55 to sell their home and purchase a replacement home of equal or lesser value and maintain the property tax basis of their original home) cannot be combined with a gift or sale of the original home to a child under Proposition 58, which thankfully still works well in concert with a trust loan, buying out inherited sibling property.
Fortunately, Proposition 193 is also intact, allowing grandparents to transfer their current tax-basis to grandchildren. The wonderful thing, still, is that these property tax benefits can always apply to a gift, sale or hybrid of the two and can amount to enormous property tax savings. And that is truly what this is all about.