Proposition 19 Alert - Huge Parent to Child Property Tax Changes
Under current law, parents are able to pass low property tax assessments to their children in two ways:
- A parent’s personal residence, of unlimited value, may be gifted during lifetime or upon death with no reassessment, regardless of how the children will use the residence.
- Up to $1,000,000 of assessed value of any other real property. Assessed value is the value which is taxed, not the fair market value of the property at the time of death or transfer.
Proposition 19 will limit the ability of children to keep low property tax payments on gifted or inherited property in three ways:
- A parent’s personal residence may be gifted during lifetime or upon death only if the child who receives it will use it as their personal residence. Once the residential use ends, the property will be re-assessed.
- If a child receives a personal residence exclusion, the child will receive their parent’s property tax assessment, plus up to $1,000,000 in additional value at their parent’s assessed value. As an example, this would allow the child to receive a home with a $500,000 assessment, plus another $1,000,000, taxed as if it was only a $500,000 home. However, if at the time of transfer the residence is worth more than $1,000,000 over their parent’s assessed value, the excess would be taxed.
- Using the previous example, assume that parent owns a residence with a $500,000 assessed value, which is worth $2,000,000 on the open market. The first $1,500,000 of value would retain the parent’s $500,000 assessment. The $500,000 amount over the $1,500,000 limit would be added to the parent’s assessed value. Therefore, the child would receive a new assessed value of $1,000,000 (parent’s assessed value plus the $500,000 amount over the limit).
- What if the home worth less? Assume that parent owns a residence with a $500,000 assessed value, which is worth $1,200,000 on the open market. Because it is less than the $1,500,000 limit, the child would retain their parent’s $500,000 assessment.
- There will be no reassessment exclusion on any real property other than the parent’s personal residence.
- This law will go into effect on February 16, 2021.
To avoid this problem, real property gifts must be recorded, or the parent’s death must occur, before February 15, 2021, and a complete, accurate, Claim for Reassessment Exclusion must be submitted. Failure to do so timely and correctly will result in the property being re-assessed. With such high penalties for making a mistake, this is not a job for a do-it-yourselfer.
How Can I Estimate What This Will Cost My Children?
We have provided two property tax increase estimators.
- To calculate the possible increase of a residential property tax increase, click here.
- To calculate the certainty of a property tax increase for vacation homes and investment property, click here.
What Can Families Do?
Consider gifting or selling real property to children now. A gift must be reported, but in most cases will not result in any federal estate and gift tax. A sale will have income tax consequences, but the property tax savings over a child’s lifetime may be far greater.
Develop a property tax strategy for the future. Prop 19 will not affect other strategies we have used in the past, such as transferring property into a limited liability company and then to the children.
Who Should Call Our Office?
We are giving priority to existing clients with significant real estate investments, or who want to “lock in” a gift of their personal residence. Because of the short time available before enactment, appointments are first come, first served, and limited.
An emergency Prop 19 consultation and written recommendation will cost approximately $500, and the fee for implementing the plan will vary depending upon complexity and the amount of time remaining to implement.
To schedule an appointment, please call (925) 906-1880, or email our calendar coordinator, Michelle Adams, calcoor@AcunaRegli.com. Because of the short time available and the high demand, payment of the $500 consultation fee will be required in advance.
***DISCLAIMER This article generally explains Proposition 19 and is not intended as legal advice for your particular matter. You should retain a qualified attorney and tax professional before transferring any real estate or acting in response to the passage of Proposition 19.***
How to Estimate a Residential Property Increase:
|1.||Enter Your Home’s Current Fair Market Value:|
(an estimate from Zillow.com will suffice)
|2.||Enter Your Home’s Current Assessed Value:|
(this is on your property tax bill)
|3.||Add line 2 plus $1,000,000||$________________|
|4.||Subtract line 3 from line 1||$________________|
|5.||If line 4 is a positive number, add line 4 + line 2||$________________|
|6.||Line 5 is your child’s new estimated assessed value.|
Multiply that number by .0125 to estimate how much their new annual property tax will be.
How to Estimate a Vacation Home or Investment Property Increase:
|1.||Enter Your Property’s Current Fair Market Value:||$________________|
|2.||Multiply line 1 by .0125 to estimate how much your investment property’s new annual property tax will be.||$________________|