There has been a lot of talk lately about estate planning with California real estate after the passage of Prop 19, with the focus being the major changes affecting the property tax reassessment exclusion for properties transferred between parents and children.
As the above article explains, Prop 19 undoubtedly includes some unwelcome consequences when it comes to inherited properties, particularly family homes of high value relative to their tax base, or any property not used as a primary residence.
That being said, anyone who knows me knows that I believe in a couple of virtues very strongly:
1) Accept what we cannot change. From February 16, 2021 onward, people simply have to accept the new laws under Prop 19 and how they affect properties transferred between parents and children. Many property transfers that would have previously escaped reassessment under former loopholes no longer will. We have to accept that and plan accordingly within the boundaries of what the new law allows.
2) Focus on the positive. More on that below.
So what are some of the positive aspects of Prop 19 that enabled it to get voted into law in the first place? One of my favorites involves a silver lining for those over 55 who are planning an in-state move.
Under the former law (Propositions 60/90), a person over 55 years of age could only transfer their existing property tax base year value to a replacement residence of equal or lesser value if it was located in the same county, or another county that had adopted an ordinance allowing transfers from other counties (many did not).
Now, under Prop 19, from April 1, 2021 and following, those over 55 can transfer the existing property tax base year value of their primary residence to a replacement primary residence located anywhere in the state, regardless of the county or value of the replacement primary residence. This applies to any primary residence that is purchased or newly constructed as that person’s primary residence within 2 years of the sale of the original primary residence.
This is great news for those over 55 who want to relocate closer to family or medical care, to downsize, or simply to find a home that better fits their needs and lifestyle for their next chapter in life. The new law no longer restricts the options to the same county or the short list of participating counties. Furthermore, the new law allows us to transfer our base year up to three times, whereas the former law only provided us with one.
Therefore, if you own a home currently with a relatively low property tax base, you will have the freedom to transfer that base value to any California county of your choosing. If the value of the replacement residence is equal to or lesser than the value of the original residence, your tax base from the original residence will carry over and become the tax base for your replacement residence. If the value of the replacement residence is greater than the original residence, you will still retain the original residence's tax base up to the market value of the original residence, and will only pay additional property taxes based on the difference in market value between the two properties.
Anyone seeking to take advantage of the above will need to file an application with the county assessor in which the replacement primary residence is located.
Lastly, when making decisions regarding your residence, you may want to consider future estate planning opportunities that exist under Prop 19. Specifically, if your residence (or replacement residence) is one that a child may wish to take as their primary residence later on, you can transfer it to them upon your death and pass along your property tax base if the child takes it as their primary residence by claiming the homeowner's exemption within 1 year, subject to the $1 million dollar limit in excess of your taxable base year value.
Minimizing taxes is always part of the conversation when it comes to decisions regarding estate planning. That being said, taxes should be a factor to consider, and not become "the tail that wags the dog." Too often advisors are quick to make recommendations simply based on tax outcomes alone, without putting the decision in the overall context of what is most important to the client (i.e. their goals and values), which should always come first.