PART ONE: California Beneficiaries Learn How to Make Prop 19 Work For Them

California Beneficiaries Learn How to Make Prop 19 Work For You - Part 1

California Beneficiaries Learn How to Make Prop 19 Work For You – Part 1

Representatives of the 2021 California Legislature don’t talk very much about Californians who are on the losing side of Proposition 19. They admit to “sweeping changes” in a generic sense, but rarely how those sweeping changes affect middle class people, not multi-millionaires, in specific actionable ways, such as unique property tax benefits thanks to Proposition 13… avoiding property tax reassessment, much to the benefit of regular working families’ bank accounts

We’re not talking about millionaires or billionaires here, we’re talking about middle class, working families who want their children or grandchildren to be able to inherit their home and be able to take advantage of a low Prop 13 tax base. It is as simple as that.

To take advantage of Proposition 19 or Proposition 58 to avoid property tax reassessment, heirs or  beneficiaries must move into an inherited home as a primary residence, within 12 months after the surviving parent passes away. Thereby avoiding property tax reassessment, as long as the offspring don’t decide to use this inherited property as an investment property… for vacation or rental purposes.   It sounds complicated, but it’s not.

For example, take a house in Santa Barbara bought by your parents in 1975 for $100,000.  By now, it’s valued at $2,000,000, yet the assessed value under Proposition 13 is $200,000. Therefore, your parents pay approximately $2,500 a year in property taxes, after local property tax assessments. Proposition 13, thankfully still hanging in there, allows for an unlimited parent-to-child exclusion, or “principal residence exclusion” as attorneys would call it; permitting offspring to inherit this home plus the $200,000 assessed value and the low $2,500 yearly tax hit. The 2% annual cap protects your property taxes so they can go up only $50 roughly per year.

Prop 19 caps the “principal residence” parent-to-child exclusion is now, since Feb 16, 2021, capped by Proposition 19 at $1,000,000 meaning, if we’re using our example of a $2,000,000 house in Santa Barbara (an admittedly modest home for Santa Barbara)… the additional $1 million in value will result in property taxes of $10,000 plus per year. 

Paying taxes only on 50% of your home’s value does sound like a great way to save on property taxes. However, it this can also be a negative for numerous working families… as there are also other costs, for instance maintenance, utilities, water, air conditioning and/or heat, unexpected repairs, certainly there is insurance and frequently a mortgage.

Factoring all this together, if you inherit a home and decide not to move in as a primary residence – your property taxes will go up abruptly and significantly! Regrettably, your lovely new inherited home will be reassessed at the full market value of $2 million, resulting in an annual tax bill of over $25,000! Not an attractive outcome for a middle class homeowner.

The Los Angeles Times characterized Proposition 19 as a tax law that: “…would just expand the inequities in California’s property tax system.” They claim it is a “…cynical and unwelcomed melding of good and bad tax proposals”.

The San Francisco Chronicle wrote: “It’s still a flawed package, designed to rev up home sales that benefit real estate agents who could reap more in commissions.”

And Mercury News wrote: “Prop. 19 merely plugs one hole in the state’s porous property tax laws while creating another. It’s time for holistic reform that simplifies the system and makes it more equitable…”

And yet, ironically, many of the same California newspaper editors that now vehemently appose Proposition 19 had formerly been printing articles and editorials that repeatedly indicated that limiting the ability to keep parents property taxes in California or “…limiting or ending the Proposition 58 parent-to-child exclusion was a good thing for California”. 

Oddly enough, these Editorials and Op-Eds were trying to convince CA homeowners that the Proposition 13 enabled process of transferring property taxes, and obtaining a parent to child property tax transfer was not — as the entire state of California has thought since 1978 — actually beneficial to homeowners and beneficiaries inheriting property from parents.

– the ability to transfer parents property taxes and keep parents property taxes in California when inheriting property taxes, were not positive property tax benefits for beneficiaries or homeowners.  Even though now, their official opinion is quite the opposite.