How Will the Passing of Prop 19 Affect My Estate Plan?
One of the cornerstones of estate planning is the transfer of grandparent and parent owned real property on to the next generation. Due to the rapidly increased property values in California, this planning has become especially important to allow the younger generation to get a foot in the door with homeownership. Since 1986, Proposition 58 has further incentivized these transfers by allowing for the exclusion of reassessment on the transfer of parent owned real property, and in some circumstances grandparent owned real property, for the primary residence and up to $1 million dollars on any other property transferred. This allows children or grandchildren who properly exercise this exclusion to maintain the property tax basis their parents or grandparents had which is generally significantly lower that today’s assessed values.
However, it looks like some of that is about to change with California’s projected passing of Proposition 19. It is important to note that as of the writing of this article, the passing of this Proposition has not been certified, but it has a present “yes” vote of 51.1%. This means the “no” side needs 62% of the nearly 1.5 million votes left to be counted to pull ahead. All signs point towards it passing.
Prop 19’s primary stated purpose was to protect seniors (55 and up), disabled homeowners and those who lost their home in a natural disaster, by allowing them to buy replacement homes at any value anywhere in the state and transfer their tax base from the old home to the new home with an increase only for the difference in market value. Under Prop 19’s language, those eligible can now do this type of transfer up to three times. This part of the law is stated to go into effect on April 1st, however it is unclear without further guidance from the board of equalization whether or not any three transfers prior to that date will be grandfathered into this new plan.
Unfortunately, contained in the fine print of Prop 19 is also the abolishment of the exclusion from reassessment on any property transfers from grandparent or parent to child that are not being used as a primary residence or a farm. Additionally, if the current market value does exceed $1 million and is used for a primary residence it would still be partially reassessed just not to full market value. Practitioners are hoping that this formula is clarified in the future by the Board of Equalization as it is not entirely clear how this will be computed. Since this portion of the law would start to apply to transfers starting on February 16, we see many homeowners who are considering transferring their property, especially their second or third homes, to their children now. It is important to keep in mind though that, while cost basis is “stepped up” to market value at death, that is not the case for transferers before death. That means “knee jerk” transfers prior to February 16, 2020, could cause unintended but significant capital gains taxes.
If part of your estate plan includes transferring on family-owned property to your children or grandchildren, now would be a good time to have a conversation with your estate planning attorney and CPA or financial advisor regarding your goals and the ramifications of transfers of real property given the new rules under Proposition 19.