With the passage of Proposition 19 Californians have eliminated many of the property tax exemptions they have enjoyed for decades. This exemption was for transfers between parents and children and in some cases, grandparents and grandchildren.
THE OLD LAW
Prior to the passage of Proposition 19, a parent could transfer a personal residence of unlimited value to children without an increase in the property taxes that the parents paid on the home. So for parents, like mine, who had owned their homes for decades, their children could receive a lifetime gift of the property or an inheritance of the residence at their death while retaining the very low property tax rate the parents paid while they were alive.
The new law, which goes into effect February 16, 2021, requires the child receiving the residence to live in the home as his or her principal residence immediately after the transfer in order to receive the exemption. And the exemption limit is now capped at $1 million, indexed for inflation. This will be problematic for many of our estate planning clients. In the past, the estate planning attorneys at Sandoval Legacy Group were able to exclude the residence from reassessment whether the children lived in the home or not. And it did not matter the value of the home.
Even if one of the children desires to live in the home, the new law still creates a dilemma for clients who are house rich. Because the value of the house could make up most of the estate, the parent would be forced to give of his or her estate to the child who will reside in the other children would not receive an equal share. In order to balance the estate out between the children, there would likely have to be a reassessment for the share of the residence not gifted to the child who will be occupying it.
Prior to Proposition 19, the tax attorneys at Sandoval Legacy Group were also able to transfer real property in addition to the residence with an assessed value of up to $1 million to children without reassessment. So if you owned a vacation home, rental property, or you rented a commercial building you own to your business, our attorneys could also transfer these properties with property tax reassessment (or reduced reassessment if the value was more than $1 million). Unfortunately, starting February 16, 2021, this will no longer be the case. Your children would have these properties reassessed for property tax purposes.
HOW DOES THIS EFFECT YOU?
This may not not effect you at all. If you have only one child and you will be leaving your residence worth less than $1 million to that child so he or she can live in it as his or her residence, Proposition 19 will not change anything. That child will continue to receive your current lower property tax assessment.
In the alternative, if your executor or trustee will be selling all of your real estate within a short time after your death, then again your children will not be adversely effected since they will not continue to own the property for an extended period after your death.
But if you intended to have your children retain your residence and other real property after your death, perhaps to generate long term cash flows for them from the rent, or for one or more of them to retain the property, whether it is lived in or not, they will in most cases be looking at paying higher property taxes as the result of the passage of Proposition 19.
WHAT CAN I DO IF I WANT TO RETAIN MY LOW PROPERTY TAXES FOR MY CHILDREN?
Contact our office at 951-787-7711 as soon as possible to get some information about a unique planning strategy that the tax planning attorneys at Sandoval Legacy Group has developed. This planning strategy would allow you to grandfather in the current unlimited residence exemption amount for a residence that will be passed to children. The strategy will also keep the exception from reassessment for up to $1 million in assessed value for other real estate such as vacation homes, residential rental property, and commercial real estate. If this is of interest to you, you must act very quickly because the new law goes into effect on February 16, 2021, and all of your planning must be completed before then.
Have a question? Ask Dennis.
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