This month, I come to you about the recent change in property tax law that governs, among other things, inheritance and subsequent limitations over the old law.
As you may know, Proposition 19, the Family Home Protection and Fairness in Property Tax Reassessment Act, sponsored by the California Association of Realtors, was approved by voters last November. Prop. 19 is a Constitutional amendment to Prop. 13, the landmark proposition that attempted to stabilize property taxes back in 1978.
In order for you to understand the changes that are coming, it is important to have a basic understanding of Prop. 13 and Property Tax Administration. Allow me to break it down a little. When you buy a home in the State of California, the price for which you purchase your property is typically at market value. Prop. 13 requires that such market value is assigned as the home’s base-year value when determining the assessment of real property. Prop. 13 also caps property taxes at 1 percent of the assessed value with an increase of not more than 2 percent annually.
The passage of Prop. 19 now marks significant changes to property tax law, especially regarding inheritance and families. That is because, for many years, homeowners, in particular, parents, have been able to pass down their Prop. 13 assessed value onto their children as a way to generate wealth.
Others, such as seniors or people affected by wildfires and natural disasters, have also benefited from the transferring of their Prop. 13 assessed value when needing to relocate.
Proposition 19 impact these two policy areas:
One is effective Feb. 16 of this year, which will impact family transfers and inheritance;
The second part goes into effect April 1, which will expand benefits for those who are at least 55 years of age (or affected by natural disasters)
Let’s look at the first part because the deadline is fast approaching and it does significantly change how your property transfers between parents and children without being hit with a huge, unintended tax liability.
Current law, that is Propositions 58 and 193, allows family members to transfer a property and its assessed base value without reassessment, even if those who inherit do not end up using the property as their primary place of residence. For example, they could inherit the property and use as a rental property. Current law also allows $1 million in additional property to be transferred without assessment, such as rental homes or commercial property. A married couple can transfer up to $2 million.
Under Prop. 19, the home that is transferred must serve as the primary residence of the parent or grandparent — no other property can be considered. The child (or grandchild) must make the home their primary residence within one year of the transfer.
Prop. 19 provides a formula to calculate the new assessed value that’s somewhat complicated and I’m not going to try and break it down here. I am posting on my website, assessor.lacounty.gov/prop19, examples of the new requirements.
As I mentioned, the implementation date of this provision is Feb. 16.
The second component of Prop. 19 pertains to allowing homeowners who are at least 55 years of age, disabled or victims of natural disasters and expands benefits when they transfer their property tax base when they sell their home and purchase a new one.
Eligible homeowners will now be able to transfer their assessed value anywhere within the state and allow the tax-base-year assessed value to be transferred to a more expensive home with an upward adjustment.
The number of times that an assessment can be transferred increases from one under current law to three under Prop. 19 for those meeting the eligibility requirements. The effective date for this portion is April 1.
At this juncture, I offer this word of caution as I realize these dates are fast approaching. There are many instances when the benefits of transferring property to their children or transferring their tax-base might actually be financially harmful because of capital gains taxes or other unintended consequences. Please consult professionals in financial planning, especially when rushing to beat these deadlines.
We will continue to aggressively educate the public about the changes occurring in Prop. 19. For more information about Prop. 19, please go to assessor.lacounty.gov/prop19.
This article originally appeared on The Signal.
