Written by Jill Roamer J.D.
November brought with it changes to California’s real property taxation laws. Proposition 19 passed narrowly and modified laws which were already on the books. Let’s take a look at the old rules and then how the new rules will work.
In many places in California, real property has been sky-rocketing in price in the last several decades. Having real property reassessed with regard to taxes could bring with it hefty tax bills; laws were put into place to curtail the rising tax issues.
Proposition 13 has been law in California since 1978, as an amendment to their Constitution. Proposition 13 dictated that the rate of increase of property assessments would be tied to an inflation factor and could not be greater than 2% each year. Also, it provided a limit on property taxes to 1% of the assessed value. Finally, it prohibited a reassessment on real property unless there was a change in ownership or the home was new construction.
Proposition 58 came later, in 1986, also via Constitutional amendment. It dictated that certain transfers between parents and their children would not trigger a property tax reassessment. So, when the child inherits the property from the parent, the child’s property taxes are calculated on the factored base year value and not the current fair market value at the time of the parent’s death. (Proposition 193 in 1996 excludes transfers from grandparents to grandchildren from reassessment.)
CA Rev & Tax Code § 69.5 gives certain tax breaks to anyone over the age of 55, or those who are severely and permanently disabled. Such individuals can have a transfer of the base year value from their old home to a new home of equal or lesser value. In most instances, one can only take advantage of this law once in their lifetime. And, the new home must be in the same county as the old home, unless the old and new counties have reciprocity agreements amongst themselves.
Along comes November of 2020 and Proposition 19, promulgated by the California Association of Realtors. The Proposition, in some form, was already proposed in years prior. However, it passed in 2020 with a narrow margin of the vote (51.1%) partly because the increase in revenue was promised to go towards combating the devastating California wildfires.
There are two main changes that will be upcoming in 2021 due to Proposition 19:
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Many Americans don’t have a will. Why not? Well, the reason may be that they don’t want to think about death. Maybe they balk at the idea of attorney fees. Or, maybe they simply don’t want to risk getting COVID-19 by traveling to do business. As quarantining, social distancing, and Zoom meetings become the new norm, will electronic wills also become a new norm? Four states (Arizona, Indiana, Florida, and Nevada) currently have electronic will statutes, and some states have temporarily authorized them during COVID-19. At the end of August, Utah became the first state to pass the Uniform Electronic Wills Act. This law became effective immediately, meaning that citizens of Utah have had a few months to take advantage of it.
Of the laws that authorize electronic wills, Utah’s is the broadest. Arizona’s followed the traditional rules for witnesses, which meant that although they could digitally sign the document, they had to be physically present with the testator. And all four states that have so far authorized electronic wills required someone to take custody of the electronic file after signing. All four of these states adopted laws expressly authorizing electronic wills prior to the Uniform Law Commission’s completion of its model electronic wills proposal. Utah, however, waited until after the proposal was complete, and therefore adopted some of its more liberal qualities. Among these is the obviation of “qualified custodians” of the digital will. The Uniform Electronic Wills Act also allows for remote witnessing! Additionally, it recognizes that a digital signature might become a paper document, and seems to recognize that a will might be partially electronic and partially paper. Finally, the Act codifies its previous recognition of “harmless error.”
While all of these qualities serve to make it easier for Utah’s citizens to execute their wills, there remain some snags. Although the Uniform Electronic Wills Act recognizes electronic wills executed in other states, the reverse likely isn’t the case. A will executed under this Act in Utah may therefore fail to comply with the laws for electronic wills in Arizona, Nevada, Indiana, and Florida, not to mention in states that have no such law. Furthermore, while this electronic method of will execution has hopefully made it easier for Utah residents to execute wills, some fear that it also creates new opportunities for bad actors to take advantage of the elderly and will thus increase fraud, abuse, exploitation, and therefore probate litigation too. But time will reveal the risks, and hopefully the solutions, too.
Now that the Uniform Electronic Wills Act has been completed and subsequently adopted by Utah, will other states follow suit? In light of the restrictions we now face due to COVID-19, will states that previously wouldn’t have considered enacting such a statute now be more open to the idea? Of course, time will tell but it wouldn’t be surprising if more states begin to follow Utah’s lead.
The law offices of Jeffery C. Nickerson is dedicates to helping all people and families with their wills, trusts, and estate plans. Contact us for more information and how we create something to give your family peace of mind.
Written by Robert Nickerson
Within the 2020 election, proposition 19, a constitutional amendment for property tax transfers and exemptions was approved. This is the biggest change to property taxes in California since prop 13 in 1978. For obvious reasons, home owners need to understand the new consequences of it and what it's going to do for families in the Golden State.
What Proposition 19 does is targets two groups: it provides a tax break for homeowners over the age of 55, disabled people or victims of wildfire or natural disaster. Those following people, if they relocate in California, may transfer their primary residences taxable value to a replacement residence to equal or less value.
If the new primary home is worth more the original residence, then the taxable value of the replacement is increased by the difference between a cash value of the new property and the old one. And the ability to transfer the taxable value can be done up to three times.
Now what about the second group? The tax advantage is where this unfortunately comes in; The children (or grandchildren who qualify) who receive real estate through bequest or gift. Before Prop 19 was passed, it was common for a property's taxable value to be reassessed based it's current market value at the time of it's transfer, though that wasn't the case between a parent and a child. What the law allowed was a parent to transfer a primary residence of an unlimited tax value, plus up to $1 million for other real estate, so the children to keep the low tax value that was used by the parents. It also allowed the child the use the property as they wished, as a residence, vacation rental, a rental property or something else.
With Prop 19, it is now severely limited. In order for the child to be exempt from the taxable reassessment, they need to use the primary residence as a… primary residence and they have to claim it within one year.
Transferred homes that were not used as primary residences (like a rental property or a vacation home), will automatically be reassessed at the current fair market value to calculate a new annual property tax.
Even if the primary residence qualifies for a reassessment exemption, if the market value is more then $1 million, then there will still be a reassessment to recalculate.
So if parents with vacation homes or rental properties want to transfer their real estate assets to their child, then they may want to do so before February 16, 2021, the day in which Prop 19 takes effect.
There is an approaching window coming and now may be the time to think about all of this. The Law Offices of Jeffrey C. Nickerson can help out with all of that. Contact us for more information regarding the transfers of real estate within an estate plan.
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