Proposition 19: Impact on Property Taxes and Transfers to Children

New law goes into effect February 16, 2021

We hope this message finds you and your loved ones safe and healthy. On November 3, 2020, California voters approved Proposition 19, which will severely impact property taxes on real property transferred to children after February 16, 2021.

In California, property taxes are levied annually based on the property’s “assessed value” (typically determined at the time of purchase) and can only increase 2% per year unless a “change in ownership” occurs. Thus, if you have owned your property for decades, you are likely paying lower property taxes than your neighbors who have more recently purchased their property. Property taxes are reassessed (at the then fair market value) when there is a “change in ownership” unless an exclusion applies. Effective February 16, 2021, Prop 19 will impose severe limitations on the (currently generous) Parent-Child Exclusion from property tax reassessment. Property owners wishing to transfer real property to their children (or, in limited circumstances, to their grandchildren) should read this notice carefully and consider immediately scheduling a Prop 19 Consultation with one of our attorneys.

SUMMARY OF CHANGES TO EXCLUSION RULES

Current Rules

Principal residence: Parents can transfer their principal residence’s current assessed value to their children, regardless of the residence’s value and regardless of whether the children thereafter occupy the property.

Other real property: Parents can transfer up to $1 million of assessed value of other real property (vacation, rental, etc.) to their children.

Rules After Prop 19

Principal residence: Parents can transfer their principal residence’s current assessed value only if a child will also occupy the property as their principal residence, and this is limited to $1 million of exclusion of fair market value above current assessed value.

Other real property: Any transfer of other real property (vacation, rental, etc.) will result in a full reassessment for property tax purposes.

WHAT DOES THIS MEAN FOR YOU AND YOUR FAMILY?

Transferring real property to your children before February 16, 2021 may lock in the assessed value and could save your children significant amounts of money on future property taxes. However, since there are additional tax and control implications to consider, please consult a qualified attorney prior to completing any transfers.

WHO SHOULD CONTACT US IMMEDIATELY?

1) Owners of California real estate with a low assessed value whose children wish to retain the property after inheritance/transfer. PLEASE COMPLETE OUR INTERACTIVE SELF-ASSESSMENT FORM ONLINE BY CLICKING HERE OR ANSWER THE QUESTIONS BELOW.

2) People currently administering a Trust/Estate where the decedent’s children wish to retain the real property. If possible, transfers should be completed prior to February 16, 2021 or you may cost the beneficiaries thousands of dollars in future property taxes.

3) People with a Qualified Personal Residence Trust (QPRT) where the fixed term ends on or after February 16, 2021.

OUR IMMEDIATE GOAL

Various planning strategies are being discussed among California estate planning professionals. However, any strategy is hypothetical until the governing regulations are issued by the Board of Equalization (BOE), which we anticipate occurring in January. Even after regulations are provided, the BOE regularly issues additional guidance to County Assessors based (in part) on subsequent court decisions.Since these rules are new, we cannot guarantee whether an effective strategy exists without further guidance from the governing agencies and courts. Thus, our goal is to determine if a transfer of your real property prior to February 16, 2021 makes sense. Then we can discuss which strategy, if any, may best achieve your goals.

SELF-ASSESSMENT AND YOUR NEXT STEPS

For each parcel of California real estate you may wish to transfer to your children, please complete this Self-Assessment (also available as an interactive form by clicking here) to determine whether you should immediately schedule a Prop 19 Consultation:

1) Do you own any California property that was ORIGINALLY purchased by you individually, jointly, by a trust, or was inherited? (i.e., NOT originally purchased by an LLC, corporation, or similar legal entity.) (For most clients owning California property the answer to this question will be Yes.)

  • NO: No need for a Prop 19 Consultation
  • YES: Proceed to question 2

2) Are you willing and able to give up control of, access to, and equity in any of your real property during your lifetime?

  • NO: No need for a Prop 19 Consultation
  • YES: Proceed to question 3

3) Do your children wish to retain any of your real property following your death or lifetime transfer of the property?

  • NO: No need for a Prop 19 Consultation
  • YES: Proceed to question 4

4) Is there a significant difference between the current fair market value and the “assessed value” of any of your real property? (The term “significant” is subjective. For example, a difference of $100,000 may result in a property tax increase of approximately $1,100 per year (approximately $11,000 over ten years). A difference of $500,000 may result in a property tax increase of approximately $55,000 over ten years.)

  • NO: No need for a Prop 19 Consultation
  • YES: YOU MAY BENEFIT FROM PROP 19 PLANNING - Proceed to “Your Next Steps”

Your Next Steps: Please contact us to schedule a Prop 19 Consultation. We do not have long before this law goes into effect. If you do not contact us immediately, we may not be able to assist you prior to the deadline. Prop 19 Consultations will cost $400, which will include our analysis of the information you provide, as well as up to a half hour of time with an attorney to determine if you may benefit from additional planning.

Prior to your Prop 19 Consultation, please provide a copy of your existing Trust (unless we already have it). In addition, for each parcel of California real estate please provide:

  • A copy of the most recent property tax bill;
  • The value of the mortgage, if any, on the property;
  • The current fair market value of the property (an estimate is acceptable); and
  • The current income tax basis of the property (if you are unsure, consult your tax advisor).

Regardless of whether Prop 19 affects you, a periodic review of your estate plan is recommended. We are happy to schedule a periodic review consultation for you after February 16, 2021. Should you have any questions or concerns, please do not hesitate to contact our office.

Pederson Law Offices,
A Professional Law Corporation
(805) 495-3444
info@pedersonlawoffices.com

This notice is for informational purposes only and does not constitute legal advice.

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