Californians narrowly passed Proposition 19 earlier this month with a 2% margin, essentially ending your ability to transfer real estate to your children free of property tax reassessment. The proposition has two fairly distinct parts. The first allows homeowners who are 55 or older or those who lost their home in a natural disaster to transfer their tax assessment to a new home. The tax value of the new home will be added to the current tax assessment if the new home is more expensive, a transfer like this can be done three times and homeowners have two years to sell their current home and buy a new one.

The second part of Proposition 19 removes the ability for a parent to pass a home to a child or grandchild without reassessing the home value, unless it’s the child’s or grandchild’s primary residence. If the child or grandchild doesn’t live in the inherited home and instead chooses to rent it out, the tax value can be reassessed. Previously, a home could be transferred to family members and the property tax would not be reassessed. Typically, when property transfers ownership, the property value would be reassessed to market values for the purpose of property taxes. Under the existing law, there are exemptions that Proposition 19 would remove. One such exemption would allow a transferor to pass (1) a principal residence (regardless of value), and (2) an additional $1,000,000 in assessed value of other real estate (note that a property’s assessed value – the value shown on the property tax bill – is often much less than fair market value), to children free of property tax reassessment.  Certain grandchildren with deceased parents may also be eligible for this exemption.  These transfers can occur as lifetime gifts or upon the transferor’s death.

Under Proposition 19, the exemptions allowed intra-family property transfers will be ended or greatly limited.  First, the exemption from reassessment for up to $1,000,000 in assessed value of property other than a principal residence transferred from parent to child will not be allowed. Second, when a parent to child transfer of a principal residence property occurs, it must meet the new requirements and may only be partially exempt. The new requirements say the child must continue to use the property as his or her personal residence as evidenced under penalty of perjury, and if the fair market value of the residence upon transfer exceeds the parent’s assessed value plus $1,000,000, then the property will be partially reassessed. These transfers of principle residences are no longer guaranteed to be exempt from property tax reassessment and all other property transfers will likely trigger a reassessment. 

So what happens to taxes on inherited property? That’s not entirely clear, as state and local officials are designing a new program to carry out Proposition 19, and not all of the details on family properties have been worked out. Inherited homes overall will have higher assessments. Children moving into the family home after their parents have transferred it can expect higher tax bills, depending on the property’s market value compared to its assessed value. Inherited vacation and rental properties exemptions will be eliminated going forward. Next year, those properties will be re-assessed at market value when the ownership changes.

Proposition results won’t be certified in the state until Dec. 11, after which the Board of Equalization could provide further guidance. Proposition 19 is set to go into effect on February 16, 2021. That being said, there are two main parts to the deadlines. New rules for transfers of inherited property will begin February 16 and new rules for taking a favorable assessment on a home purchase start April 1.If you have a property that you intend to pass to the next generation (regardless of whether it is your home, or it is a rental, commercial or industrial property), it might be wise to do so quickly. If you have questions about how Proposition 19 might effect you and your real estate holdings, please contact your Linkenheimer CPA.