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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