The Ramifications of Prop. 19
By John M. Lee
The newly passed Proposition 19 from the November elections that many homeowners are talking about is a double-edged sword. While touted during the election season as property tax fairness that will help out the elderly, handicapped and firefighters, it had potentially severe financial consequences for children inheriting property from their parents that most voters were unaware of.
Starting April 1, homeowners who are older than 55, have severe disabilities or lost a home in a natural disaster, may transfer their property tax basis anywhere within California up to three times. In the past, homeowners could only transfer the tax basis once in their lifetimes and only if they purchased a home at a price that is equal to or less than what they sold their original home for, and only if the County governing body voted to allow it.
With the new law, homeowners are allowed to purchase at a higher price and carry the old tax basis over to the new property at a blended assessment. For example, if a senior couple sold their home with an assessed value of $500,000 for $2 million and purchased a new home for $2.5 million, the new home would be assessed at $1 million, which is the $500,000 previously assessed value plus the $500,000 difference in home value, resulting in tax savings over the old system.
But unfortunately, many people were not aware of the second part of the same proposition and will experience a negative impact since it seriously limits the availability of the parent-to-child transfer exclusion for tax assessments and will result in higher property taxes to future generations.
Before the passage of Prop. 19, children could inherit their parents’ principal residence without triggering any new property tax reassessment. In addition, any other properties such as vacation homes or investment properties could be transferred up to $1 million of assessed value being exempted from increase in property taxes.
Beginning Feb. 16, however, that all changes under Prop. 19. Children who inherit property after that date will get a market reassessment up to the market value, thus increasing the property taxes. If a child chooses to use the property as his/her principal residence, there will be up to a $1 million reassessed value excluded from the new property tax basis. Vacation homes and investment real estate will be reassessed up to market value and the inheritors will face a significant increase in property taxes.
What can people do about this significant tax that was not well understood? Some people were considering a lawsuit because Prop. 19 ties together two separate major tax issues with different goals and consequences under one measure. But the courts have been very reluctant to overturn any voter results, and I am not sure that this will happen.
Others have taken action to transfer their properties to their children before the law takes effect on Feb. 16. Some are transferring their real estate into limited liability corporations (LLCs) to keep the property tax basis. However, those decisions result in the cost basis of the property to remain at the low level and, if and when the children decide to sell, it will trigger a large profit and capital gains issues because they will not get the benefit of a step up basis when the parents pass away.
Also, what if events in life do not happen the way they should? What if the children and parents get into a big disagreement? Will the children use the properties as leverage? What if the children are married or get married and then get divorced? Will the spouse fight for their portion of the properties? There are quite a number of issues and problems with whatever the property owners decide to do.
The consequence of any action or inaction can have serious financial impacts. Each individual’s assets and wishes are different. My recommendation is to consult with legal and tax professionals in regard to your personal situation and figure out the best course of action.
John M. Lee is a broker at Compass specializing in the Richmond and Sunset districts. For real estate questions, call him at (415) 465-0505 or email firstname.lastname@example.org.
Categories: Real Estate