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Property tax portability (Statewide Proposition 19) was on
the ballot this year. As of today, the measure appears likely to
pass with approximately 51.1% of the current vote tally. Proposition 13
(1978) has shaped the way property taxes are calculated for homeowners
in California for decades, by allowing parents to pass their property
to their children while keeping their same property tax basis. However,
as property values have increased statewide, seniors who wanted to
downsize sometimes felt trapped in their home. Changing homes in
many cases meant increased value and increased taxes. Seniors on
fixed incomes could not afford the increased property tax.
Prior to Prop 19, only a few California counties allowed
seniors to transfer their property tax basis to a new home in the new
county. Most counties prohibited such transfer of an existing tax
basis. This was one of the key selling points for proponents of this
year’s Prop 19. While it appears likely to pass, the election will not
be certified until December 11, 2020, and there are still outstanding
ballots to process. But assuming Prop 19 passes and becomes law, what
does it mean for California property tax issues?
First, Prop 19 would allow a property tax basis transfer
between counties for three groups of people: individuals that are (1)
over the age of 55; (2) severely disabled; or (3) victims of wildfire
or natural disaster. To transfer the tax basis, the eligible individual
must acquire a replacement property at or below the full cash value of
the current home. If the replacement property has a full cash value
that exceeds the value of the replaced property, the new tax basis
would be calculated by adding the excess value to the cash value of the
new property for property tax purposes. The individual must claim
the homeowner’s exemption at the time of the purchase or transfer in
order to avoid reassessment, but there is a one-year cure period.
Second, Prop 19 changes the tax basis for inherited
property. Under existing law, property transferred between parent and
child was always exempt from reassessment. Under Prop 19, if passed,
transfer of properties between parent and child will retain its current
property tax basis only if it is maintained as a primary
residence by the child. If the child does not maintain its primary
residence in the transferred property, the property will be reassessed
for tax purposes. This means, for example, that if mom and dad transfer
a rental property to their child and that child maintains its
rental/investment property characteristic, it would be subject to
reassessment.
Now, you might be wondering, what happens to properties
that were transferred between parent and child prior to the passage of
Prop 19 that are used as rental property. Let’s say, mom and dad transferred
their primary residence to their child in 2013 and that property
has been consistently used as a rental property since the child
received it -- will it be subject to reassessment now? That is a good
question, and it may take some test cases to make it through the courts
before we know for sure. But, based upon the text of the
Proposition, it seems that this situation would not result in a
reassessment. Sec. 2.1(d) states: “Subdivision (h) of Section 2 [which
exempts a transfer of a principal residence to a child and does not
require a child to maintain the use as a primary residence] shall apply
to any purchase or transfer that occurs on or before February 15,
2021 (effective date), but shall not apply to any purchase or
transfer occurring after that date.” Thus, it appears that a child
could receive mom and dad’s primary residence prior to the effective
date and keep the parents’ property tax basis without being required to
maintain the property as a primary residence.
However, if the same scenario transfer occurred after
the effective date, the child would have to maintain the received
property as a principal residence to maintain the property tax basis.
Sec. 2.1(c)(1) of Prop 19 specifically requires that “the property
continues as the family home of the transferee.”
One thing is certain, if you are considering an
inter-family transfer in the foreseeable future, there may be some tax
benefits to completing that transfer before the effective date of Prop
19. The attorneys at BPE Law have significant experience in
advising realtors, investors and property owners related to their real
estate needs and goals.
The information presented in this Article is not to be
taken as legal advice. Every person’s situation is different. If you
are facing a legal issue of any kind, get competent legal advice in
your State immediately so that you can determine your best options.
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