Californians voted for the approval of Proposition 19 this past election, which alters the assessment of property taxes. Before Proposition 19, there was a limit on annual increases on property taxes, which capped at 2 percent unless the property changes ownership or undergoes improvements. Surviving children were also allowed to inherit their parents’ properties and, in most cases, keep the low property tax base to avoid an increase in property taxes.
Before Proposition 19, moving into a home of equal or lesser value within your county would allow you to maintain the same property tax base. Proposition 19 extends this privilege to anyone moving within the state of California rather than only within their representative county. A new adjustment will include the difference between the previous home’s sale price and the new property’s taxable base if it has a higher tax base.
These rules are even more flexible for those 55 and older, who have severe disabilities, or those displaced by natural disasters. Under Proposition 19, people who fit into these demographics can move up to three times, maintain their tax base, and receive a favorable property tax adjustment if they move into a home with a higher tax base. This flexibility does not come without consequence, however. Proposition 19 will likely keep financial planners and estate planning attorneys busy through February 15th, 2021, when Proposition 19 goes into effect.
Inheriting property can be life-changing and often serves as the legacy item that parents leave their children. Previously, children could inherit their parent’s property and make it their primary residence and maintain their parent’s property tax base. Other properties received a $1 million gain exclusion when inherited from a parent before affecting the tax base. Straight forward property tax projections have allowed parents and their financial planners & estate planning attorneys to predict whether children moving into the home was affordable for their children. If the answer was yes, parents could comfortably spend their savings, knowing their children can afford to live in the house they inherit. In light of Proposition 19, it would be wise to take a closer look at your estate plan if you own properties and plan to pass them on to your heirs.
The new law establishes changes to the $1 million gain exclusion on all inherited properties. The first change is an inherited home passed from the parent to their child must serve as a primary residence to qualify for the $1 million gain exclusion. Previously, a child could inherit a home and maintain their parent’s property tax base regardless of the gain if it served as their primary residence. Second, there is no exclusion for all other properties, meaning all other inherited properties establish a new tax basis when ownership changes from a parent to a child. Before Proposition 19, a $1 million gain exclusion existed on properties not used as a primary residence before any tax base adjustment.
In all cases, to qualify for the gain exclusion, transferring ownership of a home from a parent to a child needs to be done in a reasonable amount of time to be eligible for the $1 million gain exclusion. Whether you plan to move into a new home or are considering how Proposition 19 will affect your inheritance or estate plan, you should contact your financial planner or estate planning attorney.
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