After Passage of Prop 19, Consider Transferring California Real Property to Avoid Property Tax Reassessment

Californians have voted to implement Proposition 19, a ballot measure that significantly narrows the parent-child property tax exemption allowing transfers of real property between parents and children without a reassessment of the property’s taxable value to its current fair market value. Proposition 19 would impact California real property that you plan to transfer to your children, whether they plan to use it as a vacation home or investment property. It may be important to transfer California real property that you plan to leave to your children or grandchildren before February 15, 2021, if you want to avoid property tax reassessment. As we noted in recent alerts (see Time to Plan for Year-End Gifts and Is Now the Time to Use Your Lifetime Exemption?) there are also compelling reasons to consider accelerating your estate plan through 2020 lifetime gifts.

Proposition 19 will essentially end your ability to transfer real estate to your children free of property tax reassessment. If you have a legacy 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), you must act quickly.

Currently, California law excludes transfers of real property from reassessment for property tax purposes under two exclusions:

1. Principal residence exclusion: A transfer of your principal residence to your child may be fully excluded from property tax reassessment, regardless of the market value of the property and whether the child subsequently uses the property as a principal residence or for some other purpose, such as a vacation or rental property. Under the exemption, children not only receive the benefit of the existing assessed value of the property but also can pass some or all of that benefit along to their own children.
2. $1 million lifetime non-principal residence exclusion: The first $1 million of assessed value (not fair market value) of any real property, including vacation, rental, and business property, which you transfer to your child may be excluded from property tax assessment.

Proposition 19 repeals the existing exemption for transfers between parents and children (and between grandparents and grandchildren whose parents are deceased) and replaces it with a much more limited exemption. Beginning with transfers occurring on and after February 16, 2021, the parent-child exemption is limited to transfers of a principal residence that the transferee will use as a principal residence, as well as to certain farm property. In addition, if a transfer qualifies for the exemption, a principal residence with an assessed value in excess of the taxable value of the residence as of the date immediately prior to the date of the transfer, plus $1 million, will trigger a partial property tax reassessment, even if the property will continue to be used as a principal residence by the transferee. Starting February 16, 2023, and every February 16 thereafter, the $1 million threshold will be adjusted annually at a rate equal to the change in the California House Price Index for the prior calendar year.

If you are thinking about transferring real property in California to your family for estate planning purposes, making the transfer on or before February 15 may enable you to preserve the property tax value under the existing exemption limits.