Proposition 19: What All Real Estate Owners Should Know

Proposition 19, which passed in the November 2020 elections, is set to take effect on February 16th, 2021. While Proposition 19 brings a few important changes, the amendment that stands out the most is how children inheriting property from their parents affects their ability to take advantage of the tax breaks Prop 13 once set.

Current Tax Advantages

Under the current law, property tax is based on the value of the property at the time it is either purchased or built. The value of the property increases each year at a capped rate. It’s very common to see the assessed value of a property to be drastically lower than the rate of fair market value.

With that said, current law also allows the children of a parent-child transfer of real estate property to continue to pay their property taxes at the same assessed value as their parents. Currently, this tax break is limited to inheritance of property with an assessed value of $1 million dollars per person (or $2 million if both parents exclusions are used.)

Currently, the property being transferred can be used as a primary residential property, a second home or can be used commercially. The fair market value of the property is not considered at all. If the real estate transaction between parent and child go over the $1 million in assessed value limit, the child would be subject to a tax reassessment at the time of transfer.

If the parent’s real estate property in question is their primary home, there is no limit on the assessed value and the child could retain the same property tax rate.

How Proposition 19 Changes the Game

The child in a parent-child real estate transaction could only continue to pay the same property tax based on the property’s assessed value if the child makes the property their primary residence.

In other words, the child cannot use the house as a second home or as a rental either residentially or commercially. If this is the case, the real estate transaction will cause a reassessment in assessed value which will certainly cause the annual property tax to dramatically increase.

Parents who own many properties in California should be aware that inheriting property to your children after February 16th, 2021 will trigger immediate reassessment of the value of the property for tax purposes.

Proposition 19 does not affect capital gains tax, which is a Federal income tax matter. It also does not affect real estate transactions outside of California. It only directly modifies local property tax matters under Prop 13 for California real estate transactions only.

If you have any questions regarding Proposition 19, you can call or write us for a consultation.