Proposition 19 may affect at least 650,000 Californians, are you one of them?
Since 2010, about 650,000 California residents have received a tax break allowing them to maintain their relatives’ low property taxes when they inherit the home. The recently passed, Proposition 19 eliminates the ability for a home to pass from a parent to a child or grandchild without reassessing the home’s value, unless it’s the child’s or grandchild’s primary residence. If the child or grandchild doesn’t live in the inherited home, for example if they choose to rent it out instead, the tax value can be reassessed.
Currently, under Proposition 13, real estate is reassessed at fair market value for property tax purposes when it changes hands, unless certain exemptions apply. One exemption currently in effect is referred to as the parent-to-child exclusion. It allows taxpayers to transfer their family home or family farm to their children (or grandchildren) without being subject to a property tax reassessment. In addition to the primary home or family farm parent-to-child exclusion, the taxpayer is also allowed to transfer $1M of other real property tax base to their children free of reassessment.
The passing of Proposition 19 means many inherited properties will be more expensive to retain. Proposition 19 eliminates the property tax break for investment homes and commercial properties, meaning that heirs who inherit their parents’ properties would pay taxes based on market value. However, with some limitations, children who move into homes inherited from their parents would be able to retain the tax break.
The enactment of Proposition 19 may have you reassessing your future plans as to buying, selling, or transferring ownership of property before the measure takes effect, which is set to begin on Feb. 16, 2021. Also, the 2017 Tax Cuts and Jobs Act changed the estate and gift tax regime by increasing the amount of assets an individual may pass to their heirs tax-free. This is known as the “lifetime exemption”. The amount of assets that can pass without being subject to the 40% estate/gift tax for 2020 is $11.58M per person ($23.16M for a couple). Under the current law, the lifetime exemption is set to be adjusted for inflation to $11.7M per person ($23.4M per couple) for 2021.
However, the Biden administration may reduce these lifetime exemptions to as low as $1M per person for gifts ($3.5M for estate tax). There’s even a chance this change could be retroactive to January 1, 2021. Therefore, if you are planning on gifting real estate to your children, you may want to consider making those gifts before the end of 2020. Others may find that this is the right time to sell property they had previously planned on passing on to the next generation.
At Velasco Law Group we want to highlight the urgency of the inheritance changes. Clients who have previously set up an estate plan with us should contact us to review the plan and see if Prop 19 impacts it. Those who have not yet made an estate plan can work with one of our knowledgeable team members to create a comprehensive estate plan that takes all the latest laws into consideration and balances that with the unique and specific needs of your family and finances. Contact the Velasco Law Group now here to see if your estate planning is impacted by Proposition 19 and to work with our experts to find the right solution for you.