What a wild 2020 election! Although the California election results will not be certified until December 11, the unofficial results are showing a yes on Proposition 19, a new regulatory update which may affect many families throughout California. (The unofficial results also show a no on Proposition 15, which related to reassessment of commercial properties.)
Currently, under Proposition 13, real estate is reassessed to fair market value (FMV) for property tax purposes when it changes hands, unless certain exemptions apply. One exemption, referred to as the parent-to-child exclusion, allows taxpayers to transfer their family home or family farm to their children without being subject to a property tax reassessment. In addition to the primary home or family farm parent-to-child exclusion, the taxpayer is also allowed to transfer $1M of other real property tax base to their children free of reassessment.
For example, if you have a primary home with a property tax base of $1.5M (and FMV is $3M), a vacation home with a property tax base of $400K (FMV is $1M), and a rental property with a property tax base of $600K (FMV is $1.5M), you can transfer all of these to your children free of property tax reassessment.
Starting February 16, 2021, Proposition 19 requires the beneficiary of the primary home or farm to use the property as the beneficiary’s family home or farm within one year of inheriting the property in order to qualify for the parent-to-child exclusion. Additionally, the exclusion is capped at the parent’s tax base plus $1M. The additional $1M of other real property tax base is eliminated.
For example, if you have a primary home with a property tax base of $1.5M (and FMV is $3M), a vacation home with a property tax base of $400K (FMV is $1M), and a rental property with a property tax base of $600K (FMV is $1.5M), the primary home would be reassessed on the amount of FMV above $2.5M ($1.5M plus $1M). The rental and the vacation home would be reassessed.
The good news is if you are planning on gifting real estate to your children, you have until February 15, 2021, before Proposition 19 is in effect. However, there may be a reason to consider making these gifts before the end of 2020.
The 2017 Tax Cuts and Jobs Act (TCJA) changed the estate and gift tax regime by increasing the amount of assets an individual may pass to their heirs tax-free (referred to as the “lifetime exemption”). The amount of assets (lifetime exemption) that can pass without being subject to the 40% estate/gift tax for 2020 is $11.58M per person ($23.16M for a couple). Under the current law, the lifetime exemption will be adjusted for inflation to $11.7M per person ($23.4M per couple) for 2021.
Under a Biden administration, these lifetime exemptions could be reduced to as low as $1M per person for gifts ($3.5M for estate tax) and be retroactive to January 1, 2021. Therefore, if you are planning on gifting real estate to your children, consider making those gifts before the end of 2020.
Currently, under Propositions 60 and 90, taxpayers over the age of 55 are allowed to sell their principal residence and transfer their property tax base to a replacement primary residence within 10 specific counties in California. This transfer only applies when the replacement property is of equal or lesser value.
Starting April 1, 2021, Proposition 19 also allows taxpayers who are over the age of 55, severely disabled or victim of a wildfire or disaster to transfer their primary residence’s property tax base to a replacement property anywhere in the state and allows the transfer to also apply to a more expensive primary residence. The proposition also increases the number of times a taxpayer can apply for this transfer from one to three.
See Wildfire Tax Relief for additional assistance options. If you have any questions, reach out to our experts.
