For those curious/concerned/afraid of Prop 19, let me share my thoughts.
I’ve had about a dozen clients inquire about the impact of Prop 19 (which becomes effective on Feb 16, 2021) on their situation . . . and more continuing to call each week.
Background: Property is reassessed for property tax purposes when a “change in ownership” occurs. A transfer from parent to child (or grandparent to grandchild) used to be excluded from the definition of a “change in ownership”, so there would be no reassessment upon transfer, whether or not the transfer occurred during life, or upon death (through a will, trust, etc.). Prop 19 removed a transfer from “parent to child” as an exclusion, unless the child lives in the property as their primary residence (evidenced by recording a Homestead on the property).
Another bit of relevant background, property transferred to children upon the death of a parent (whether by trust, will, intestacy, etc.) qualifies for a “stepped up” basis for capital gains purposes. Property that is transferred to children prior to death does not receive a stepped up basis (i.e, resulting in much higher taxes when sold.)
So, how can families minimize the hit they will take if they inherit property after February 16, 2021? A main factor is what the children plan to do with the property they inherit.
Generally speaking, if the children intend to hold on to the property (and perhaps generate income by renting it out) for a long time, then it may be useful for the parents to transfer the property to the children now (before 02/16/21) to preserve the low tax basis for property tax purposes and lose the stepped up basis for capital gains purposes since the capital gains tax won’t be due until the children sell the property, which may be years or decades in the future.
Generally speaking, if the children intend to sell the property pretty quickly to enjoy the lump sum cash, then it is probably better that they preserve the stepped up basis for capital gains purposes and not worry about the short term reassessment and increase in the property taxes.
Realistically, the end result of Prop 19 is NOT to protect those 55 or older, the severely disabled, or victims of fires. The end result will be more property sales, which is why the California Association of Realtors contributed $35.7 million to get it passed and the National Association of Realtors contributed another $4.8 million (for comparison, the Firefighters Ballot Issues Committee contributed $100k).
DISCLAIMER: This is general information and is not to be construed as legal advice applicable to any specific person or situation. Feel free to reach out to me or any other qualified attorney if you want advice specific to you or your situation.