Proposition 19 Impact on Property Taxes in California
Proposition 19 Impact on Property Taxes in California
Now that the popular Proposition 58 tax break system has changed into tax measure Proposition 19 – these are some of the key issues specific to modern Proposition 19 property tax relief.
These changes cover real property parent-to-child transfers after Feb 16, 2021. Whether key outcomes are based on the death of a parentbefore Feb 16, 2021, or based on deeds filedafter Feb 16, 2021, is still questionable, whether Proposition 19 would apply, or if California parent to child exclusion from property tax reassessment, derived from Proposition 58, will apply – with respect to parental property tax transfer.
We believe the bottom line is simply to continue applying political pressure on those in power in this state – to make sure the California property tax system continues to provide genuine property tax breaks for residents, with the ability to avoid property tax reassessment via Proposition 19 (formerly Prop 58 and its’ parent-child exclusion) in concert with a loan to an irrevocable trust – keeping a low property tax base when inheriting a home, when buying out property shares from co-beneficiaries through a trust loan; with the ability to keep parents property taxes, with the right to transfer parents property taxes, getting the most out of Prop 13 and Prop 19 property tax breaks upon the transfer of a home, when inheriting property taxes.
Positive Changes Affecting Heirs & Homeowners From Prop 19
1. One major change is that Proposition 19 eliminates the parent-child and grandparent-grandchild exclusion from reassessment for properties other than a primary residence.
2. California homeowners over the age of 55 or with severe disabilities (which is still not defined as to what the exact definition of “severe” is) will have the ability to transfer their current property tax assessed value (i.e., “base year value transfer”) of their primary residence to another primary residence anywhere in California.
This change eliminates the problem of not being able to take advantage of Prop 58 and its’ parent-child exclusion in all 58 counties in California – in terms of being approved, or not approved, for a base year value transfer.
In other words, Proposition 19 is strictly statewide, without obstacles blocking your ability to avoid property tax reassessment in some counties, while there is no problem avoiding property tax reassessment in other counties! That type of bias towards homeowners and beneficiaries in some counties caused a lot of problems in California.
This change enables residents to purchase a more expensive home rather than a more inexpensive home to keep tax the relief benefits of the base year transfer. If a more expensive primary residence is purchased, there is now a rather complex formula to minimize the increase in base year value. Moreover, Proposition 19 now increases the number of times the exclusion may be used, up to three times in a lifetime.
The Proposition 58 parent-child exclusion and other tax breaks have now changed into the Proposition 19 Parent to Child Property Tax Transfer
As most Californians are aware, a home undergoes reassessment at “market value” if it’s transferred, inherited, sold or gifted – and, in turn, taxes on the property often increase significantly. Yet, if the sale or gift or transfer is between parent and offspring, in certain situations, the home won’t undergo reassessment once specific requirements are met and the relevant application is filed properly.
As we know, a new homeowner’s property taxes are calculated through the time honored, low Proposition 13 base year value, typically what parents had paid… as opposed to so-called “fair market value” or “current market value” when new property is acquired – gifted, bought, generally inherited… As most homeowners know by now, real estate transfers excluded from property tax reassessment by Proposition 58 or Prop 193 have to be used as a principal residence (with no value limit).
For those of you who are extra detail oriented – Proposition 58 is established in section 63.1 of the Revenue and Taxation Code. It’s also worth mentioning that, with respect to Proposition 193, parents of a grandchild do have to be deceased prior to property transfer from grandparent to grandchild. Alternatively, the grandparent’s child can be deceased, with the surviving parent-in-law being remarried prior to the transfer event.
The below bullet points may untangle some of the confusion that has formed around some of these property tax breaks. We need to take note that property tax relief limitations built into Proposition 19 are presently serving as a replacement to the pre-Feb 2021 Proposition 58 parent-to-child exclusion, also referred to as a “parent-child exemption” (from property tax reassessment).
Some of the new Proposition 19 tax breaks are a work in progress, however most have been given a stamp of approval by the BOE
• Proposition 19 was more or less rushed through the political and electoral process, passed by the CA Legislature in under a week, and placed onto the Nov 2020 ballot, changing the California state constitution without implementing the appropriate statutes. Homeowners’ ability to transfer parents property taxes, in other words the right to keep parents property taxes on any parental property tax transfer, inheriting property taxes from Dad or Mom… and enabling heirs to keep parents property taxes are sill in place as valid tax breaks, allowing beneficiaries or heirs to avoid property tax reassessment – the process is just more limited than it was previously.
Moreover, establishing a low property tax base along with the transfer of property between siblings, sibling-to-sibling property transfer – buying out a sibling’s share of inherited property through a trust loan, in conjunction with Prop 58, is still firmly in place, however inheriting property taxes from Dad or Mom is now limited somewhat by Proposition 19. Similar limitations are now in place as well concerning the process of inheriting property taxes from a parent, the parent to child transfer and exclusion for reassessment of property taxes, or parent-child exclusion (from property tax reassessment at current market rates).
• Sections of the approved documentation and revisions to various sections are vague at best and often unclear
• To correct these issues, Santa Clara County Tax Assessor Larry Stone was appointed by the California Assessors’ Association (CAA), with four other tax Assessors, to a hastily formed CAA “committee” to try to provide some clarity to the new Proposition 19 implementation process.
• The CAA “committee” has enlisted supposed specialists and tax lawyers throughout California, and is working with the Board of Equalization (BOE) to furnish guidance and where necessary recommend passage, on an urgency basis, towards implementing appropriate statutes.
• Homeowners over the age of 55 (or “who meet other qualifications” which remains vague) would be eligible for property tax savings when they move. To avoid property tax reassessment at current or “fair market” rates, beneficiaries inheriting property from parents must move within 12-months into an inherited home, using this property only as a primary or principle residence.
• Likewise, the parent leaving the home to beneficiaries must have been residing in that home as a principle or primary residence. Apparently, going forward into 2021 and beyond, there will be no exceptions to these new rules and regulations.
• Only inherited properties used as primary homes or farms would be eligible for property tax savings. Those who are “severely disabled”, or whose homes were destroyed by wildfire or a “natural disaster” can now transfer their primary residence’s property tax base value to a replacement residence of any value, anywhere in the state. This was considerably more limited prior to Feb 2021.
• Eligible homeowners can now take advantage of “special rules” to move to a more expensive home. Their property tax bill would still go up but not by as much as it would be for home buyers that are “not eligible”.
• Eligible homeowners may use these “special rules” three times in a lifetime. (for declared disaster victims, there is no limit on the number of times these benefits can be used.)
A claim form must now, as of Feb 2021, be completed and signed by the transferors and transferee and filed with the Assessor. A claim has to be filed within three years after the date of purchase or transfer, or prior to the transfer of the real estate to a third party, whichever is earlier.
If a claim form has not been filed by the date specified above it will be timely if filed within six months after the date of mailing of the notice of supplemental or escape assessment for this property. If a claim is not timely filed the exclusion will be granted beginning with the calendar year in which you file your claim.
Will California Reinstate Propositions 58 Property Tax Transfer Laws?
Assembly Constitutional Amendment 9 (ACA 9) has been introduced by Assemblyman Kevin Kiley, of Granite Bay, CA – to formally reinstate Propositions 58 and 193, and return the parent-child exclusion to full unlimited measure; without imposed limits, to the CA state constitution – restoring the ability of parents and grandparents to pass on property to the next generation without any deceptive obstacles and/or property tax increases.
The CA Legislature Assembly Constitutional Amendment 9 was introduced by Assembly Member Kiley on May 03, 2021, regarding property taxation & the transfer of an inherited home to a principal residence, for beneficiaries.
ACA 9 is written into the official California record, as follows:
“The California Constitution limits the amount of ad valorem taxes on real property to 1% of the full cash value of that property, defined as the county assessor’s valuation of real property as shown on the 1975–76 tax bill and, thereafter, the appraised value of the real property when purchased, newly constructed, or a change in ownership occurs after the 1975 assessment, subject to an annual inflation adjustment not to exceed 2%…
The California Constitution, until February 15, 2021, excluded from classification as a “purchase” or “change in ownership” requiring reappraisal the purchase or transfer of a principal residence and the first $1,000,000 of other real property of a transferor in the case of a transfer between parents and their children, or between grandparents and their grandchildren if all the parents of those grandchildren are deceased.
On November 3, 2020, the voters approved Proposition 19. Pursuant to Proposition 19, the California Constitution, on and after February 16, 2021, removes the above-described exclusion from classification as a “purchase” and “change in ownership” requiring reappraisal, and instead excludes from classification as a “purchase” and “change in ownership” the purchase or transfer of a family home or family farm, as those terms are defined, of the transferor in the case of a transfer between parents and their children, or between grandparents and their grandchildren if all the parents of those grandchildren are deceased, if the property continues as the family home or family farm of the transferee. In the case of the exclusion so provided to a transfer of a family home, the California Constitution, pursuant to Proposition 19, requires the transferee to claim the homeowner’s or disabled veteran’s exemption within one year of the transfer.
This measure would repeal the above-described provisions of Proposition 19. The measure would reinstate the prior rule excluding from classification as a “purchase” or “change in ownership” requiring reappraisal the purchase or transfer of the principal residence and the first $1,000,000 of other real property of a transferor in the case of a transfer between parents and their children, or between grandparents and their grandchildren if all the parents of those grandchildren are deceased. The measure would apply retroactively to all effected purchases or transfers occurring on or after February 16, 2021.”
Prior to 1978 with the advent of Proposition 13 becoming law, capping property tax reassessment at 2% for owned property in California, residents found themselves paying arbitrary property tax hikes more and more often, with elderly homeowners, living on a modest fixed income, being evicted when they couldn’t pay egregious tax hikes, which started to become a frequent event; and began to alienate and anger the middle class public, to an extreme degree. It wouldn’t be an over-statement to say this widespread displeasure opened up the doors wide for a tax break like the parent-child exclusion! Property tax breaks that enabled the middle class all across California, when inheriting property from parents, to feel justified, just like the wealthy, to be keeping a low property tax base when inheriting a home.
Middle class residents in Californians, and working families, were frustrated that rapidly rising property values had turned property taxes into what was effectively a “death tax”. It was this overall response from the public throughout the state that left events wide open, in terms of following and supporting Howard Jarvis and his Taxpayers Association – adopting the property tax relief measure they called Proposition 13.
Under Proposition 13, which passed in a landslide in 1978, property tax assessments could no longer increase more than 2% per year until, or unless a new owner took over the property, which triggered a reassessment at current market rates. Middle class offspring inheriting their parents’ home usually figured out right away that they were going to have a real problem paying reassessed property taxes, as that tax bill was typically more than most middle class families could afford to pay every year.
So in 1978 Californians happily accepted the ability to keep parents’ property taxes, transfer parents property taxes, and inheriting property taxes instead of paying egregious tax hikes. The right to finally have access to a property tax transfer from a parent, a parent-child transfer, or parent-child exclusion, was huge for California property owners… in fact, even for renters. And certainly for residential and business, or commercial, property owners.
Then, having tasted some of “the good life”, in terms of saving on taxes, formerly enjoyed only by the nouveau riche and old money, Californians, in 1986, voted in high numbers and passed a measure called Proposition 58 with the approval of more than 75% of California voters. This amended the California constitution, to state that the transfer of real estate between a parent and a child, generally property transferred from parent to an heir, would not be considered a “change of ownership” and would fall under a new property tax reassessment exclusion, something they called “a parent-child exclusion”; capping their property tax bill at the same rate their parents paid.
Under Proposition 58 and Proposition 193, working families could transfer a home of any value plus up to $1,000,000 of assessed value of additional real estate. This protected families that owned a small business, or a condo or duplex that was rented out for income, or a vacation property. Therefore the death of a parent would not trigger a sudden reassessment of these properties at current high market rates, increasing yearly property taxes to such a degree that middle class beneficiaries would be forced to sell their inherited property shares right away.
“…a slick advertising campaign for Proposition 19 tricked voters into repealing Propositions 58 and 193 without realizing the impact it would have on their own families. Prop. 19 replaced the parent-child transfer exclusion from reassessment, which has been in the state constitution for 35 years, with a narrow exclusion that only applies to homes that the heirs move into within a year and make their permanent principal residence.
These harsh provisions took effect with lightning speed in February, at a time when families were prevented by the pandemic from meeting with other family members, attorneys or tax advisers. Many people are just now finding out what happened. Letters are going out from county assessors to grieving families advising them of their new tax obligations.
This must be fixed. And it can be if Californians make their wishes known to elected representatives. ACA 9 would preserve family businesses, affordable rental properties, and home-ownership for families that otherwise would lose the benefit of the hard work their parents put in to secure their futures.”