How California Proposition 19 Alters Taxation Impact on Homeowners and Beneficiaries

Introduction:

In November 2020, California voters approved Proposition 19, The Proposition was a significant change to California’s property tax laws, but many Californians are unaware of its impacts.  Its implementation had a substantial impact on property tax assessments, particularly for inherited properties. The proposition, which took effect on February 16, 2021, introduced several key modifications that directly impacted property owners, homeowners, and beneficiaries. 

Property Tax Transfers for Seniors, Disabled Individuals, and Wildfire Victims

To understand Proposition 19, it’s crucial to have some context regarding California’s property tax landscape. Proposition 13, passed in 1978, limited property tax increases to 2% annually and based property taxes on the purchase price of a property. This meant that long-time homeowners enjoyed significantly lower property tax bills than those who recently purchased properties.

One of the main aspects of Proposition 19 was its provisions related to property tax transfers for certain groups of individuals. Before Proposition 19, eligible homeowners aged 55 and older, individuals with severe disabilities, and victims of wildfires or other natural disasters could transfer their current property tax base to a replacement property of equal or lesser value within the same county or to various counties across the state. Proposition 19 expanded these transfer rights by allowing eligible homeowners to transfer their property tax base to a replacement property of greater value, subject to certain limitations.

Limitations on Property Tax Base Transfers for Inherited Properties

Proposition 19 significantly changed the rules governing property tax base transfers for inherited properties. Previously, when a parent or grandparent passed away and left their primary residence or other properties to their children or grandchildren, the new owners could retain the original property tax base. This practice, often referred to as “property tax reassessment exclusion,” allowed beneficiaries to inherit the property without facing substantial increases in property taxes.

Under Proposition 19, the rules for property tax reassessment exclusions changed. For inherited properties, the new owners are no longer automatically entitled to the original property tax base. Instead, the property’s assessed value may be reassessed to market value at the time of transfer, potentially leading to higher property taxes for beneficiaries.

Although Proposition 19 altered the property tax reassessment exclusion for inherited properties, it did introduce an exception. If the beneficiary uses the inherited property as their primary residence, they can still qualify for the reassessment exclusion. However, there are certain limitations to this exception, such as a cap on the taxable value increase.

The Impact on Homeowners

Proposition 19 has both positive and negative implications for homeowners:

For homeowners aged 55 and older or those with disabilities, the ability to transfer their property tax assessments is a significant benefit. It allows them to downsize without facing steep property tax increases, making it easier for them to find suitable housing options.

On the downside, heirs inheriting properties may face higher property tax bills if they do not use the inherited property as their primary residence. This change can pose challenges for families who wish to keep their inherited properties but cannot afford the increased tax burden.

Impact on Family Farms

Another significant change brought about by Proposition 19 relates to family farms. Previously, family farms were eligible for the parent-child exclusion, which allowed them to transfer the property’s tax base to their children without reassessment, regardless of whether the new owners intended to use the property for agricultural purposes. Under Proposition 19, the parent-child exclusion for family farms is no longer applicable unless the children involved in the transfer plan to use the property as their primary residence.

Conclusion:

California Proposition 19 has certainly reshaped property tax laws in the state, with significant implications for seniors, disabled individuals, wildfire victims, and beneficiaries of inherited properties. While the proposition expanded certain property tax transfer rights for some individuals, it also limited reassessment exclusions for inherited properties and family farms. As with any major legislative change, it is crucial for Californians to understand these modifications fully to make informed decisions regarding their properties and future estate planning.

California Proposition 19 significantly alters property tax laws, impacting homeowners, beneficiaries of inherited properties, and family farms. Be it property tax transfers for seniors or disabled individuals, or the change in rules for inherited properties and family farms — it’s critical to understand these changes. Grasp the implications now, and plan your future wisely.

Voss Real Estate Advisors

November 20, 2023

DST

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