Proposition 19 winners and losers – Monterey Herald

Last November, California voters narrowly approved Proposition 19. According to many real estate experts, the proposition is the most significant change in California’s crazy property tax landscape since Proposition 58 was passed in 1986. If you own a home or other real estate in California, you should take a close look at how this new law will affect you and your heirs.

Proposition 19 has two main features. First, beginning Feb. 16, it changes the way property taxes are assessed when real estate transfers between parents and children. By and large, these are the losers. Second, beginning April 1, it expands the group of homeowners who are able to transfer their taxable value from one primary residence to another. These are the winners.

Under California law, real estate is reassessed at fair market value when it is transferred from one party to another through a sale, an exchange or inheritance. In 1986, Proposition 58 created an exclusion to this rule for transfers between parents and children. Under Proposition 58, children were able to exclude from reassessment the transfer of primary residence from parents, regardless of market value, and the first $1 million of non-primary residence real property. As you can imagine, Proposition 58 has been a huge boon to families seeking to transfer wealth between generations.

Proposition 19 changes everything. Under the new law, the exclusion of non-primary residence real property has been repealed. After Feb. 16, any transfers of non-primary residence real property to your child will trigger a reassessment to the property’s fair market value. This could be a big deal as the following example illustrates.

Suppose you purchased a four-plex as a rental property in 1992 for $650,000. Now, 28 years later, that property is worth $2.5 million. However, Proposition 13 has been very good to you and the assessed value of the property has only grown to $1.13 million and your annual property tax is only $11,300.

Now suppose your child inherits the property. Under current law, most of this property would be excluded from reassessment because the $1 million parent-child exclusion applies to the assessed value of the property, not the fair market value. In other words, your child would pay just about the same property tax you did when you owned the property.

However, everything changes with Proposition 19. Because it is not a primary residence, this property is no longer excluded from reassessment. Instead, it is assessed at its fair market value and your child now faces an annual property tax bill of $25,000, more than twice the property tax you paid.

The rule changes are slightly less onerous for the transfer of a primary residence. Under the old law, the transfer of your primary residence to your child was fully excluded from reassessment. However, with Proposition 19, a primary residence is excluded only if it becomes the receiver’s primary residence. In addition, the amount of exclusion is limited. The new law allows the exclusion only to the extent that the fair market value of the property is less than the property’s assessed value immediately before the transfer plus $1 million. If the fair market value is greater than that threshold, the new assessed value will be the fair market value less $1 million. I know that sounds crazy, so let me work through an example with you.

Let’s suppose your home’s assessed value is $300,000 at the time of your death and its fair market value is appraised at $1.7 million. The new law’s threshold for reassessment is the previous assessed value ($300,000) plus $1 million, or $1.3 million. Since the fair market value of $1.7 million is greater than $1.3 million, the new assessed value would be $1.7 million minus $1 million, or $700,000. But remember, to get this exclusion, your child needs to make this property their primary residence.

The winners under Proposition 19 are homeowners looking to move within the state. The new law allows them to take their home’s taxable value with them as long as they are over 55 years old, have certain disabilities or are victims of wildfire or other natural disasters. If they buy a home of greater value than the home they sell, the taxable value of their new home is their old taxable value plus the difference between the purchase price of their new home and the sales price of their old home.

If you find this a bit confusing, you are not alone. If you wonder how Proposition 19 might affect you personally, please consult with an experienced attorney. But hurry. The new law goes into effect on Feb. 16.

Steven C. Merrell is a partner at Monterey Private Wealth Inc., an independent wealth management firm in Monterey. He welcomes questions you may have concerning investments, taxes, retirement or estate planning. Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA  93940 or email them to [email protected].