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What California’s Proposition 19 Means For You

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A lot was going on in the November 2020 election. One proposition that made its way onto ballots in California—and was narrowly approved by voters—was Proposition 19. This measure, which went into effect on Feb. 16, 2021, makes several changes to the state’s property tax rules. Many estate planners who own homes in California need to be aware of the restrictions Proposition 19 puts on inheritors of California homes. 

No More Property Tax Breaks for Some Heirs

Before Proposition 19, California property owners could generally transfer homes to children or grandchildren and ensure the property would keep its property tax assessment from its original purchase date. That tax benefit for inherited properties is no longer available except in specific circumstances:

  • Heirs must move into the inherited property within one year of the property transfer AND make the property their principal residence. That means the practice of using inherited properties as second homes or rental properties while keeping existing tax assessments is over. 
  • There is a limit to heirs’ using the “principal residence” exemption to Proposition 19 described above: Under the new rules, property tax assessments must be reevaluated if the inherited property’s fair market value is more than the current taxable value plus $1,000,000. 

To illustrate this, let’s consider a home that’s transferred from a parent to a child after Feb. 16, 2021. This home was purchased in 1985 for $200,000 and now has a fair market value of $1,500,000. To find out its new taxable value, you must first take the home’s current fair market value and subtract $1,000,000 and the existing taxable value ($1,500,000 – $1,000,000 – $200,000), which comes out to $300,000. You must then add that value ($300,000) to its existing taxable value ($200,000). This means that, under Proposition 19, the child will have to pay taxes based on a $500,000 value. 

So, even though the home’s taxable value goes up to $500,000 from $200,000, the child would not have to pay taxes based on its current fair market value ($1,750,000) if he moves into the home within one year of transfer and uses it as his principal residence. 

Benefits of Proposition 19

The effects of Proposition 19 listed above earned it plenty of detractors. However, homeowners 55 or older and those with disabilities will be able to purchase a more expensive home anywhere in California and keep their previous tax assessments. This benefit extends to homeowners whose houses are damaged by wildfires and other natural disasters. 

The Bottom Line

Proposition 19 substantially changed many of the provisions that had been in place since 1978, when Proposition 13 took effect. There are still tax breaks to be realized by heirs in California, but it will likely require a more strategic estate planning strategy or another look at your existing plan. Anthoor Law Group is ready to help you craft an estate plan that works for you and your family. Get in touch with us today to take control of your future.

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