California’s Proposition 19 was passed as a constitutional amendment about two years ago amid quite a bit of confusion. A large part of this stemmed from the misleading rationale that positioned it mainly as a means to extend a financial lifeline to Californians whose homes were destroyed by wildfire or other natural disasters. This paved the way for them to transfer their property tax base to a new home in any of California’s 58 counties and thus rebuild their lives after such a tragedy.
Obscuring things further were also some takebacks from the homeowner benefits offered, which largely replaced — Proposition 58. These takebacks from Proposition 58 centered mainly on the property tax benefits available when a primary residence was passed from parent to child. Now, it only covers the primary residency or family home. If it is transferred to a child, that child must make it their primary residency within one year after the transfer, and the property must remain their primary residence. Any other type of move will essentially trigger a reassessment. And many clients are still surprised about this.
Luckily the Board of Equalization has come out with clarifications and guidance on how Prop. 19 is supposed to work. So, if you’re wondering if the proposition has been a net gain or a bust, we are taking a closer look at both the good, the bad, and reviewing the new instruction in this episode of Absolute Trust Talk. Kirsten and Madison will weigh in on the proposition’s changes, what those changes mean for the citizens of California, and share some insights from the impacts we’ve been seeing with our clients here at Absolute Trust Counsel.
In this episode, we’re going to discuss:
- The enhanced property tax benefits that Proposition 19 now provides to homeowners over 55 or who have been victims of a natural disaster.
- The benefits that California homeowners lost when Proposition 58 gave way to Proposition 19 — they’re pretty substantial.
- The Board of Equalization’s part in overseeing property tax administration and how some recent changes have left the agency behind the eight ball.
- How a commonly misunderstood part of the tax reassessment process can leave some family members with a property tax bill, they hadn’t bargained for.
- What the Board of Equalization now says about the parent/child property tax exclusion if one inheriting child decides to buy siblings out of a deceased parent’s primary residence.
- Why this legislation reflects California’s push toward ADUs and how they’re favored over other forms of multi-unit residences.
Nearly every piece of passed legislation brings some unforeseen and often unintended consequences, but in several ways, Proposition 19 is unique. A large part of this distinction comes from its jurisdiction over homeowner tax protection. So, if you’re a California homeowner who plans to leave a primary residence to your children, listen in, as these changes will directly affect your — and their — financial future.
Big Three from Episode #104:
- Plenty of controversy and confusion has surrounded Proposition 19 since it was voted into law two years ago. In displacing Proposition 58, it has brought about a number of changes in California’s tax code, and a number of these changes center on the tax implications that stem from a parent passing on real estate property to their children. While it has brought about some consequences that California homeowners likely didn’t see coming, the Proposition also contains provisions that have provided tangible benefits to homeowners who are over 55 years of age or seek to reestablish homeownership in the wake of a natural disaster.
- In providing these additional benefits, other benefits were either taken away or substantially minimized. This “give and take” is a big reason why Proposition 19 continues to be a source of substantial debate, and whether or not its changes are perceived to provide concrete property tax advantages is likely the dividing line between the “Pro” and “Con” camps. Unfortunately, the latter camp seems to have grown over the two years since the Proposition passed.
- One of the starkest differences between Proposition 19 and its predecessor, Proposition 58, lies in the amount of appreciation on a primary residence that the parent/child property tax exclusion covers. Under Proposition 58, that amount was unlimited. In contrast, Proposition 19 only excludes one million dollars of appreciation. Considering the dramatic runup in California real estate prices, it will leave a substantial tax liability for many inheritors when their primary residences are reassessed upon transfer of ownership.
FREE RESOURCE GUIDE: Prop. 19 Parent/Child Exclusion
When Prop. 19 went into effect on February 16, 2021, it drastically changed the parent/child exclusion rules for reassessment, significantly impacting how parents will transfer their property to their children and how their estate plans are structured. Now that this Prop. has been around for a while, we finally have clarification on how it works. Download a FREE copy of our Reference Guide highlighting 12 items you need to know about Prop. 19 and how they could impact your estate plan.
Time-stamped Show Notes:
1:54 Here’s a little background on Proposition 19 and how it came to be law.
2:54 The good part of Prop 19 is that if you’re over 55 or a natural disaster victim, you can transfer your property tax base from your existing home to a new home, and it doesn’t matter what county you’re moving from or to.
3:57 Like most propositions, Proposition 19 contains multiple elements. However, here’s the part that most Californians are unhappy with.
4:50 The parent-child exclusion only covers the primary residence or family home if that’s transferred to a child and the child makes it their primary residence, but that’s not all.
5:42 This misleading omission in the Proposition 19 marketing campaign is why it’s still so misunderstood.
6:12 Next, Kirsten and Madison talk about some of the changes that weren’t clear when the Proposition first passed, starting with new forms – ensuring the transfer date matches the form.
6:48 The Board of Equalization has struggled to keep up with the changes the Proposition brought. It took them quite some time to update the forms but now that they have, make sure you are using the right one!
7:01 When multiple children inherit a home from their parent, and one wants to buy the others out, utilizing a bridge loan has been the most common short-term financial practice. Luckily, Proposition 19 has left it intact.
7:10 A common misunderstanding that centers on property transfers and has led to plenty of unpleasant tax surprises is that the date of transfer is also the date of death. And, if taxes are going to go up, they go up on that date.
9:22 The Board of Equalization (BOE) has added some steps to transfer a primary residence from a deceased parent to a child. Here’s a brief summary.
11:30 Because parents frequently organize their estates in this manner, the BOE’s new guidance presents a welcome change for inheriting children, but there is a catch that must be considered – There can be co-owners, but one child must still move into the house, and make it their primary residence.
12:57 Supposing one child moves out of the inherited family residence, but another moves in? Here’s what happens.
14:15 Next, Kirsten and Madison discuss what happens if a property is left in trust to benefit someone who is not a child.
16:18 When property tax reductions are involved, reassessments seem to take considerable time. Here’s what you should do.
17:50 BOE guidance on apartment units and duplexes is specific. This is how ADUs are treated differently.
20:54 If your home’s value has skyrocketed since its assessment, the million-dollar cap under Proposition 19 may impact you.
24:37 If two or more siblings inherit the family home and one makes it their primary residence, can they pay rent to those who don’t live there?
Resources/Links Mentioned in this Episode:
- Absolute Trust Talk Episode 102 Bay Area Housing Market Prices, Trends and What’s Next for 2023
- Absolute Trust Talk Episode 100: Tips and Tools for Buying a Home Despite Rising Interest Rates
- Absolute Trust Talk Episode 96: Estate Planning: House Edition
- Absolute Trust Talk Episode 92: Is a 1031 Exchange Right for Your Real Estate Sale?
- We’re pleased to provide you with a library of e-books to address common estate planning questions and concerns in practical, easy-to-understand language. https://AbsoluteTrustCounsel.com/Resources/.
- ASK KIRSTEN: If you’d like Kirsten to answer your question on the air, please email her at Info@AbsoluteTrustCounsel.com.
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