How Has Prop 19 Changed Inheriting California Property and Home Ownership?

Proposition 19’s supporters would like to reduce Prop 13’s less attractive elements and implement what they would call, “freeing-up long-term homeowners.” 

Prop 19 is expected to generate increased house sales, as well as realtor and broker commissions, which is why Prop 19’s largest supporter, the California Realtors Association spent $40,400,341 to get Prop 19 passed, and the National Association of Realtors kicked in $4,800,000 to promote such a hard-to-sell property tax measure.  The $100,000 donated by the California Professional Firefighters union to Proposition 19 pales in comparison.

Proposition 13, which passed in a landslide way back in 1978, was a unique amendment to the California Constitution which capped residential property taxes on a primary residence to 1970s levels, capping them at 1% of assessed value (plus local additions, by county).  Assessments were allowed to rise at a maximum rate of 2% per year — even though prices on real estate in California continued to increase in most of the state’s 58 counties.

Properties would be reassessed at current market rates when a total change of ownership occurred, either by death, gift, or sale — when the property in question is “transferred”.  What the CA State Board of Equalization calls a “change in ownership.”  Deceptively simple terminology for a rather complex process; made even more complex these days by varying state taxes and Coronavirus issues, verified at property tax relief websites and niche blogs like Property Tax News or Loan To A Trust.

 Inheriting California real estate and home ownership in general is different now as far as property taxes are concerned.  If a homeowner in any county bought a $2,000,000 home today, without any property tax breaks, they might pay roughly $25,000+ per year in property taxes.  A family in a nearby $2,000,000 home that’s been there for let’s say 30 years may owe merely $2,500 per year.  But it’s all relative.  Certain politicians complain about this type of inequity… however  if you bought property 30 years ago, would the same property cost the same last week?  Of course not.  So why should taxes be any different.  

Under Proposition 19, the only low Proposition 13 tax base that can be transferred to your children is that of your principal residence to your heirs (offspring).  Subsequently,  your heirs have to reside in that home also as   their primary residence.  And if that inherited home is valued at more than $1,000,000 it may be partly or completely reassessed by the local  tax  assessor, with a partial or total loss of their Proposition 13 parent-to-child exclusion property tax break.  It is not entirely clear yet how all of this will shake out once the dust settles on this. 

However the entire concept of installing a property tax hike in the midst of a flagging Pandemic economy with growing unemployment and under-employment; or even the decision by the Legislature to  promote a Proposition 19 tax hike in 2021 — to water down middle class homeowners’ ability to avoid property tax reassessment is under a spotlight and being seriously questioned in light of basic survival, and even retirement, by respected economists, academics and analytical websites.   

In most cases, Proposition 19 will effectively eliminate a parent’s right to transfer a low property tax assessment to heirs, since it is unclear at this point how  many heirs or beneficiaries inheriting their parents’ home will be all that excited about  moving into that inherited home as a primary residence — and within 12 months at that. It may be too small for a large family.  Work places may be too far away to be convenient.  School districts could b e a major issue.  And so on. 

Moreover,  many homes are worth far more than $1,000,000 in California. That makes Proposition 19, despite it’s many positive benefits, a liability for many inheritors… with challenging  outcomes for certain taxpaying residents who have inherited California real estate.

The folks who benefit from Proposition 19 are embraced clearly in its’ promotional title: “Home Protection for Seniors, Severely Disabled and Victims of Wildfire or Natural Disasters Act.”  Exactly what the definition and application of  “severely disabled” is, remains to be seen.  As mostly everything with this particular Legislature, it would be safe to say that there are a lot more assumptions in play here than specific, concrete projections that are backed up by well researched data and factual analysis. 

We can assume that homeowners who are over the age of 55, disabled or supposedly “severely” disabled, who have been harmed by a forest fire or  some other natural disaster of some kind,  will be able to transfer the assessed value of their primary California residence to a new home anywhere within the state’s 58 counties. 

This revised property tax relief procedure may be repeated  three times in a lifetime, supposedly, and so homeowners now have two years to transfer their Prop 13 low property tax base.  And one can still expect (with more limitations now built into the process) to be able to take advantage of trust lenders with a loan to a trust if the goal is to buyout co-beneficiaries (i.e., siblings) looking to sell their inherited property shares, as a transfer of property between siblings, with a loan to an irrevocable trust. 

So no matter what, at least for the moment, Californians can still make good use of a property tax transfer from a parent, a Prop 13 low property tax base — under the CA Proposition 13 transfer of property — and transfer parents property taxes, with the sole objective to   keep parents property taxes regardless, when inheriting any kind of property more or less, and inheriting property taxes under California’s parent to child transfer, known as the  parent to child exclusion — which has been the number one target anti property tax relief parties want to  water down, or even repeal.                

Additionally,  if the homeowners’ new house is assessed at a higher value  than their previous home — their property taxes might go up, however not  as high as they would have been before Proposition 19 went into effect. So there is helpful property tax relief here if you look for it, such as being able to establish a Prop 13 low property tax base.  It is just not quite  as simple and straight-forward as it once was, before Proposition 19 more or less replaced Proposition 58 in the sunny state of California, in Nov. of 2021.