On Saturday, November 28, we will be hosting a free 1-hour webinar on Prop 19, and strategies you can take advantage of before February 16, 2021.
The narrow passage of Prop 19 this past month was a game-changer to property tax rules in California. Significantly, Prop 19:
- Increased the ability for older homeowners age 55 and above (as well as disaster victims) to sell their homes and purchase a new home without having to pay exorbitant property taxes based on current fair market values.
- Decreased the ability for homeowners to transfer their real estate, during life or death, to their children without having to pay higher property taxes.
Homeowners Age 55+
Current law permits a homeowner age 55+ to sell their home and buy a replacement home under the following conditions:
- The replacement home must be purchased or built within 2 years of the sale of the old home.
- The replacement home had to be in the same county, or in certain participating counties, as the old home.
- The replacement home had to be an equal or lesser value of the old home, unless it was purchased/built one year after the sale (in which case it could be 105% of the value of the old home), or unless it was purchased/built two years after the sale (in which case it could be 110% of the value of the old home).
- The homeowner could only do this one time, unless he/she was disabled.
Under Prop 19, the replacement home can be anywhere in California and could be a greater value than the old home. For example, if the old home was worth $1.2 million and the new home costs $1.5 million, then the property tax on the new home would stay the same as the old one, but an additional $300,000 would be assessed and added to the current tax. Finally, Prop 19 allows for the homeowner to use these rules in order to buy/sell up to three times in their lifetime.
Current law permits a parent to transfer their primary residence to their children without triggering a property tax reassessment. The children can use the property however they wish and they do not need to reside there. Additionally, any additional property – up to $1 million of assessed value (or up to $2 million if married) – can be transferred to the children without a reassessment.
Under Prop 19, all property transferring between parent and child will be reassessed, with only one limited exception. If the parent’s primary home is transferred to the child, and if the child resides in the property and claims it as their primary home, then the first $1 million above the assessed value will not be reassessed.
What to Do?
The parent-child transfer rules of Prop 19 do not take effect until February 16, 2021, which means the current law still is in place until then. This means if you take advantage of the current rules under Prop 58, and strategically transfer property interests to your children, through a trust for their benefit, then you can lock in lower property taxes for the duration of your lifetime and theirs! Practitioners should be careful because an outright gift of the property to a child is disadvantageous from an income-tax standpoint and can lead to a loss of control of the property.
Furthermore, Prop 19 did not affect the rules related to real estate owned by legal entities. Therefore, utilizing the change of ownership/control rules within entities, we can leverage rental properties and properties totaling more than $2 million, locking in Prop 13 tax-basis, before they disappear forever on February 16, 2021!
To book a Prop 19 Strategy Session, or to attend our free Prop. 19 upcoming webinar, call 714-524-2400.